New 2040 diesel and petrol ban: The unanswered questions

Image of Alisdair Suttie
Author: | Updated: 28 Jul 2017 04:01

So, we now know the execution date for new petrol and diesel cars in the UK: 2040. This is when the government says sales of all new petrol and diesel-powered cars will come to an end.

Of course, it won’t be the complete end of the internal combustion engine as there will be older models still on the road then, assuming their owners have not been shunned, shamed and priced out into abandoning them in the garage.

Abandoned car in garage

One would assume we’ll no longer have a great many commercial vehicles, buses, trains, cargo ships and aviation all burning fossil fuels at colossal rates and often in the most densely populated areas where the government is seeking to improve air quality the most, though nothing much has been said about that. A well though-through strategy, then. Yes...

However, before we get bogged down in the petrol/diesel versus the environment debate, let’s look at another area the government has been tight-lipped about concerning this 2040 deadline…

image_9_3

The thorny question of tax

Specifically, how will the government make up the massive shortfall in tax it currently enjoys from fuel duty? Break down the cost of a litre of fuel, with a current motorway price of around 130-pence and you find that 58p goes directly to the Treasury, while a further 22p is collected as VAT.

Tap a calculator and you’ll see that 62% of what you spend on petrol or diesel goes into the government’s coffers. Presently, that total is just shy of £28bn per year, or around 4% of the total tax raised in the UK. And let’s not forget that’s tax being taken from money you’ve already earned and paid other forms of taxation on, so it’s not exactly deal of the century for drivers.

We accept this in exchange for driving cars and, up until now, we’ve had a fairly free rein in what we choose as our wheels. Yes, there’s been some swaying of this with tax incentives to make diesels more popular with company car drivers due to their lower carbon dioxide emissions but now, it’s all about nitrogen and sulphur dioxide and, guess what, diesels kick out more of this, so they are now in the government’s crosshairs. The weapon of choice to deal diesel a fatal blow is the electric car and 2040 is the date of destiny.

plugged in and charging

Yet, we need to know how much we’ll be paying for our motoring energy needs way before 2040 so we can make informed choices about which EV we decide to lease or buy.

How to incentive EV uptake while managing to tax them

The problems here are many and varied, not least how do you provide a sufficient number of charging points for millions of EVs without making every street look like some dystopian nightmare and causing the National Grid to go into meltdown. There’s also the small matter of EVs shuffling their point of pollution elsewhere rather than removing it.

Again, those are separate discussions, so what about tax? Well, Mark Cunningham, of accountancy firm Blick Rothberg, says: “There’s little doubt the government will come up with an electric charging tax which will impact on business and the general public. We could also see significant changes to capital allowances and company car tax rules.”

How to incentive EV uptake while managing to tax them

To make up the shortfall in tax raised from fuel duty at present, by 2040 the government may have to increase VAT on energy to 20%. That would only take them back to existing levels, which does not account for the tremendous expenditure required to change the UK’s infrastructure to deal with an EV-centred road network.

This will have to be dealt with much sooner than 2040 as many drivers are already looking to switch to EVs or hybrids as a way of future-proofing their motoring costs. The Office for Budget Responsibility predicts road tax receipts will drop by a fifth as early as 2021, which means much less money for any government to run the country.

Many campaigners on both sides of the debate now argue for a mileage-based system. This seems fair whether you’re filling up with petrol, diesel or electricity, but we still don’t know how much more electricity will be taxed.

That creates an uncertainty, and where there’s doubt there is also resistance to change. Drivers will not commit to switching to an EV if they are concerned about being hit with a hefty tax rise. Any government that tries that will soon find itself out on its ear at the next election.

London congestion

So, we need clarity and confirmation and we need it quickly. Instead of grabbing a few headlines with a Trump-style announcement with no substance or thought behind it, the UK’s government had better come up with some figures and fast.

If they don’t, they risk losing the momentum that has built up in favour of EVs, even if some of it is misguided and misinformed. We would also risk missing an opportunity to make a significant improvement to air quality and the lives of millions.

That is how important tax is at every level. Perhaps the government needs to remember their old advertising slogan. Tax doesn’t have to be taxing…

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