How will the Chancellor react to the tax trap that is closing in on the government

The government is slowly being closed in on by a tax trap as the high efficiency of the new cars today is threatening to starve the treasury of vital revenue, this is according to the car information experts CAP Automotive.

The expert analysis which has been carried out by CAP has revealed that the most popular cars today have been delivering 18% less VAT and fuel duty, and a whopping 58% less VED revenues during the last three years than their equivalent models which were registered in 2009.

This effectively means that the treasury is falling into the aforementioned tax trap, and motorists need to pay careful attention on the 5th December to the Chancellors Autumn Statement to see what, if anything, he is planning to do about this drop in revenue.

The issue stems from the success of vehicle manufacturers in reducing engine CO2 emissions and improving fuel consumption.

CAP’s insight into the performance of new vehicles shines a spotlight on exactly how costly to the Treasury the latest cars potentially are, unless the Chancellor acts to change motoring taxation policy.

As the table below shows, the issue is best illustrated by a side-by-side comparison of the 10 most popular cars registered in September 2012 with their 10 equivalents registered in September 2009

Under the fuel and VED tax regime in place between 2009 and 2012 a basket containing one each of Britain’s 10 most popular cars today would have delivered almost £5,007 less fuel duty and VAT revenue over 36,000 miles than their 10 equivalents registered in September 2009.

And the same vehicles would have cost £2,240 less to tax over 3 years.

Multiply these figures by the number of highly efficient cars that are actually registered and the reduction in revenue runs into hundreds of millions of pounds.

Drilling down to an individual example, this September’s top-selling car – the Ford Fiesta – would have cost £250 less to tax over the period September 2009 to September 2012 and owners would have paid £222 less in fuel duty and VAT than they did in the previous model.

An even more stark example of the pressure on revenues faced by the Treasury is this year’s most popular new Mercedes-Benz C Class. This would have delivered £450 less road fund license revenue over the past 3 years and a massive £1,200 less fuel duty and VAT revenue over 36,000 miles.

This particular example also highlights the impact of a general drift toward diesel, which was prompted by the introduction of CO2-based taxation. The most popular Mercedes C Class in 2009 was a petrol vehicle whereas the best seller this year is a diesel. Because diesels typically emit lower CO2 they are often chosen to reduce tax costs as well as for their fuel economy.

Mark Norman, of CAP Automotive Intelligence Services – which advises major organisations on automotive business strategy – said: “Innovations in engine design together with the Government’s reliance on CO2 emissions as a basis on which to tax vehicles have led to this problem because cars are now using substantially less fuel and emitting less CO2.

“Our analysis shows the scale of the emerging problem and the question now is not whether the Chancellor will act to stem this flow of revenues, but how. Maybe we will learn that, when he makes his Autumn Statement on December 5.

“The only realistic areas he can look at to fully address the problem are; taxing the fuel, taxing the car and taxing road use. However, taxing fuel is partially self-defeating because motorists tend to respond by using less, as we have seen over the past couple of years. Taxing the roads is a political nightmare and there is no reason to think politicians are ready to grasp that nettle.

“There is, of course, already a tax on car ownership called VED but the problem is that by encouraging the take-up of more ‘environmentally friendly’ cars the average VED paid will collapse, as our analysis has shown.

“A more sensible option, perhaps, is that the Chancellor counters the problem of dwindling VED revenues by use of a one-off ‘showroom tax’ to influence take-up of greener new cars and then work towards a more uniform VED rate for all cars after that.

“This would be unpopular among those who have already bought specific cars because they attract low-to-zero VED rates. However, if VED is going to continue to be a large revenue earner then something will need to be done.

“There is also a real emerging issue around the current VED rates on cars with high CO2, which will increasingly mean that perfectly good used cars will eventually end up being scrapped purely because they are expensive to tax, a trend which is neither sensible nor environmentally friendly.

“Clearly the whole issue is a minefield and the only certainty is that whatever option the Chancellor chooses will be fraught with difficulties and ultimately prove unpopular with motorists.”