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Vehicle Taxation Reform

Volume 720: debated on Wednesday 19 October 2022

[Relevant document: Fourth Report of the Transport Committee of Session 2021-22, Road pricing, HC 789.]

I will shortly call Wera Hobhouse to move the motion, and I will then call the Minister to respond. I remind hon. Members that there will not be an opportunity for the Member in charge to wind up, as is the convention for 30-minute debates.

Sitting suspended for a Division in the House.

On resuming

I beg to move,

That this House has considered reform of the vehicle taxation system.

I am delighted to bring this matter to Westminster Hall for debate. There is an urgent need for reform of our vehicle taxation system, for both fiscal and environmental reasons. The public understand that change must come; they look to the Government for clarity on the path to be followed. I hope that the Minister will be able to aid that process today. She will recognise that the future of travel is changing every year; Britain’s transport networks and habits are moving into the net zero era.

Electric vehicle ownership is rising, as people try to help the planet and their wallets. Battery electric vehicles, or EVs, made up 14% of the new cars sold so far this year, and more electric vehicles were sold last year than in the previous five years combined. 2030, the year in which polluting vehicles will no longer be produced or sold, is fast approaching. The Government must act to reform road tax if they are to avoid yet another huge black hole opening up in their finances.

No form of change will be easy, but the sooner change is made the easier it will be. The main form of vehicle tax in the UK is fuel duty, which is nearly 53% added to every litre of fuel paid for at the petrol pump. Fuel duty raises approximately £28 billion a year for the Treasury. That is alongside the 28% VAT that is paid on fuel sales.

I thank my hon. Friend for securing this debate. The issue of how we tax road usage is very important, but I am deeply concerned about what is happening right now. In rural areas such as mine, where cars are essential to get around, we see people being hammered at the fuel pump. In part, that is due to limited competition and because there are fewer forecourts. Does she agree that we need to expand fuel duty relief for rural communities, so that it brings down prices immediately and eases the cost of living in the short term?

Absolutely. We see that people are facing great problems in rural communities and it is important to make short-term interventions to help them. However, I am really talking today about what vehicle taxation will look like in the long term, once we transition to net zero. Nevertheless, I fully take the point made by my hon. Friend.

On the other hand, drivers of electric vehicles pay no fuel duty. The Government need to continue incentivising the use of electric vehicles for environmental reasons. However, there are many ways in which that can be done without subsidising fuel duty. One option is to increase the number of public electric vehicle charging points. So far, the UK has only 31 electric vehicle charging points and only six rapid charging points per 100,000 people. If the Government are serious about encouraging the uptake of electric vehicles, they must ensure that the infrastructure is there. That would be of great benefit to my constituents in Bath and to the wider south-west, as our region is the second largest in the country for electric vehicle uptake.

Other incentives could include providing grants for electric car conversion. The conversion of old cars has significant benefits. For example, the carbon footprint of producing a new car is far higher than that created by continuing to use an old car. Currently, buying a new electric car is not an easy option for many people who do not have off-road parking or their own charging facilities. The conversion of older cars would help lower-income families who are struggling with the cost of living crisis, while also being part of the movement to less carbon-intensive transport options.

If we are to transition to net zero sustainably, the Government must find a way to fill the taxation income gap caused by declining fuel duty. The Government’s own net zero strategy from 2021 states that the taxation of motoring must keep pace with electric vehicles. I understand that the Treasury has said in the past that the level of income from motorists should stay about the same in future, but how can that be achieved?

I congratulate the hon. Lady on securing this excellent debate. The Select Committee on Transport, which I chair, has put a series of recommendations to the Treasury, and we work closely with it. In advocating a form of road pricing, she rightly says that there will be a fiscal black hole. Some 4% of the entire tax take comes from motoring taxes. The evidence we received from the Treasury was that that figure would plummet to zero by 2040, so that means a loss of investment not just for roads, which account for just 20% of that total tax figure, but for schools and hospitals. Does she agree that the reason why we need road pricing is not just to fill the hole, but because devolved Mayors, in using their powers, are creating a patchwork of road-pricing schemes, and it will be difficult for the Government to get into that space with that patchwork already in place?

I totally agree. We need some clarity and something that motorists across the country can see as a coherent strategy, rather than the patchwork that the hon. Gentleman spoke about. One approach would be a scheme based on mileage. Other factors, such as emission levels or road type, could be added into the mix. Road pricing, as it is often referred to, is not a new idea. The Liberal Democrats proposed a version of it in our 2010 manifesto. It has been explored in depth many times. So far, no noticeable progress has been made towards its adoption and the hon. Gentleman is absolutely right that we need to act and find ways forward quickly.

Nearly 20 years ago, the then Transport Secretary said that road pricing was 10 years away, but we do not have another 10 years to waste. The motivation then was to cut pollution and reduce congestion, particularly in larger cities. Our most urgent need now is getting to net zero and, while doing that, looking at the immediate financial implications that I have mentioned.

I want to draw the Minister’s attention to an excellent report released just a few days ago by the Campaign for Better Transport. The report tested options for a national road pricing system with a large cross-section of the public. The good news is that the public appear to be open to the idea of road pricing, otherwise known as pay-as-you-drive. In the survey, nearly 50% of respondents felt that fuel duties were unfair. That is unsurprising. Low-income households are more likely to have older, more polluting and less fuel-efficient cars and to pay more fuel duty per mile travelled. That is in contrast to wealthier households with newer, more fuel-efficient vehicles. According to Policy Exchange research, someone with a new car could pay half the amount of fuel duty compared with the owner of an older car. Other findings from the report show that 65% of those surveyed believe that electric vehicle owners need to pay tax to use the road system. Drivers felt that people with electric vehicles are effectively driving tax free, while those who are unable to switch—largely for financial reasons—must pay.

We must encourage the take-up of electric vehicles to reach net zero. However, the public are acutely aware that Britain’s finances are under pressure after the recent economic shocks. Money must be found somewhere. There is evidence that the current vehicle taxation system is not fit for purpose, and the public agree. In the Campaign for Better Transport report, 60% of respondents agreed that there was a need to reform the vehicle taxation system. What options are available to Government and are these options fair in the eyes of constituents? Pay-as-you-go, or pay-as-you-drive, is worthy of consideration. It is widely regarded by experts as a progressive step forward. A pay-as-you-drive system could charge drivers directly per mile driven with a set distance charge. Another alternative could be smart road pricing, whereby the charge per mile varies depending on different factors. The Treasury would have the option of applying this equally to all vehicles. Alternatively, it could create a series of levels based on emitting status and/or the location where the person is driving.

The Climate Change Committee report to Parliament this year noted that road pricing “will be necessary” in the longer term. It recommended that the Government implement it “later this decade”. The Select Committee on Transport has recommended smart pricing, as has the Policy Exchange, the AA, and the Social Market Foundation.

For the first time in a long time, consensus is beginning to emerge. When pay-as-you-drive was initially pitched in the Campaign for Better Transport survey, 42% of respondents supported the idea, with 21% saying “No”. After the concept had been explained and questions answered, the percentage in favour rose to 49%, with opposition dropping to just 18%.

Pay-as-you-drive can come in many forms, but there are three options worth considering. One is a flat per-mile charge for electric vehicles. That would keep fuel duties as they are for existing petrol and diesel vehicles, and those duties would wither away as those cars disappear from our roads. Another option is replacing fuel duty and vehicle excise duty, with a set per-mile charge based on the emissions level of the vehicle. That could be estimated at the annual MOT mileage check. Lastly, we could replace fuel and excise duty with a smart per-mile charge that varies with vehicle type, emissions, location and time of day.

The main argument in favour of pay-as-you-drive comes from the need to reduce the number of people driving to lower congestion and reduce air pollution and carbon emissions. The transport sector is now the biggest source of domestic greenhouse gas emissions and accounts for 28% of all emissions. Cars make up 55% of that figure, while lorries and vans make up 32%. Buses, coaches, and rail collectively account for just less than 5%, according to Government figures.

A system based on rewarding those who drive less, rather than a flat rate, could lead many members of the public to use their cars less and use public transport more. The idea that drivers who drive more should pay more in tax, and that those who drive less should pay less, was popular in the survey and it is clearly the right direction to take.

There is no doubt that ensuring investment in public transport, including reforms to the integration of bus and rail ticketing systems, is critical to a functioning pay-as-you-drive system. Those reforms cannot exist in a vacuum and must be part of a wider conversation on how we move people away from private cars and on to environmentally friendly public transport.

In the Campaign for Better Transport survey, 69% of respondents stated that a key element of making the entire system fairer for drivers was to make public transport cheaper. The Liberal Democrats would seek to give new powers to local authorities and communities to improve transport in their areas. That would include the ability to introduce network-wide ticketing, like that in London, and greater powers to franchise bus services and simplify the franchise application system. We would also reverse the ban on local authorities setting up their own bus companies, which should give councils the tools to make transport accessible for everyone.

Reforming the system towards pay-as-you-go would also bring transparency to vehicle taxation. Many drivers are unaware of the level of fuel duty that exists within the price that they pay for fuel. It is important that we bring clarity and openness to the vehicle taxation system when we reform it.

We must do everything possible to reach our net zero targets. However, that transition needs to be sustainable and accessible. Pay-as-you-drive is a progressive way of solving the problem of declining fuel duty revenue. In particular, it would encourage much more sustainable transport habits. Clearly, pay-as-you-drive schemes must be combined with more investment in public transport and environmentally friendly infrastructure. I look forward to the Minister’s response.

It is a pleasure to serve under your chairmanship, Sir George, on my first outing as a Treasury Minister in Westminster Hall. I will begin by congratulating the hon. Member for Bath (Wera Hobhouse) and thanking her for securing this important debate on vehicle taxation. As today’s discussion has demonstrated, it is a highly topical issue.

These taxes bring in some £35.5 billion to the Exchequer every year—money that is essential to fund high quality public services. That sum is worth about 4.3% of our total tax take, so it is critical. As the hon. Member for Bath said, the taxes have a crucial role to play in our transition to net zero, to which this Government are absolutely committed. Vehicle taxation and its future are a matter of great public interest. Road vehicles in Great Britain covered almost 300 billion miles in 2021, underscoring our need to maintain high-quality infrastructure while minimising emissions. As we transition to net zero, it is vital that we also consider how we continue to pay for our roads, as well as our schools, hospitals and armed forces.

Let me begin to outline the background by exploring the present system of vehicle taxation. We have two main vehicle taxes in this country: fuel duty and vehicle excise duty. Fuel duty is currently the largest yielding excise regime, raising £26 billion in 2021-22. Vehicle excise duty, or road tax as it is sometimes known, is worth a further £7 billion a year. Altogether, those revenues equate to just under 40% of the total education budget for this entire financial year, as we have an Education Minister, my hon. Friend the Member for Stoke-on-Trent North (Jonathan Gullis), present in the Chamber.

We also have other smaller taxes, most notably company car tax, which raises some £2.5 billion a year. That tax applies when a car is made available to an employee for private purposes, since that represents a taxable non-cash benefit. The funds raised from all those taxes contribute to both road maintenance and the resourcing of other vital public services. The Government have refined those taxes both to help families and businesses navigate cost of living pressures and to support our net zero ambitions.

At spring statement 2022, the Government announced a temporary 12-month cut of 5p to fuel duty on petrol and diesel, worth £2.4 billion. That is the largest ever cash-terms cut to fuel duty. Perhaps I can use this opportunity to address a few points made by the hon. Member for Tiverton and Honiton (Richard Foord). First, we asked the Competitions and Markets Authority to undertake an urgent review of the market for road fuel. Its findings suggest that the fuel duty cut was largely passed through, but Government have asked it to do a fuller market study on the supply of road fuel, and Government will react to those conclusions.

I draw the hon. Member’s attention to the rural fuel duty relief scheme, which gives support to motorists by compensating fuel retailers in some select rural areas that meet certain criteria. If they qualify, there is a 5p per litre reduction for the retailers. We have also adapted those taxes to incentivise take-up of electric vehicles. Road transport accounts for a massive 24% of UK carbon emissions, so reducing those emissions is essential to the UK’s transition to net zero.

Industry statistics suggest that more than 1 million battery and plug-in hybrid electric vehicles are now registered in the UK, which is a huge success, but we need to go further and faster. To support that, we will introduce a ZEV mandate in 2024, and end the sale of petrol and diesel-powered vehicles by 2030 and of hybrid vehicles by 2035. At that point, all vehicles sold will be zero emission. In all, the Government have committed £2.5 billion since 2020 to support the transition to electric vehicles, with targeted funding to offset the higher up-front costs and to accelerate the roll-out of charge point infrastructure. That includes £500 million to support local charge point provision, £950 million to support rapid charging on motorways and major A roads, and funding for charge points in homes and businesses.

In addition to those measures, the Government also use the vehicle tax system to incentivise the take-up of vehicles with lower carbon emissions. In 2017, the Government introduced a reformed vehicle excise duty system for new cars. Under that system, zero emission models pay nothing on first registration, while the most polluting pay more than £2,000. In subsequent years most cars move to a standard rate, currently set at £165 per year; meanwhile, zero emission vehicles pay nothing, either on first registration or subsequently. Company car tax, too, is adapted to the pursuit of net zero, and it has been effective in incentivising the uptake of electric vehicles and ultra-low emission vehicles. Company cars comprise a significant proportion of electric vehicles and ultra-low emission vehicles on the road today. Those cars will filter through to the second-hand market, increasing the supply of used electric vehicles and making the transition more affordable for consumers.

I will move on to the future of motoring taxes. I start by paying tribute to my hon. Friend the Member for Bexhill and Battle (Huw Merriman) who, as Chair of the Transport Committee, has done a lot of work on that topic. As more road users switch to electric vehicles, tax receipts from fuel duty and vehicle excise duty will decrease if the present system remains unchanged. The net zero review indicates that tax receipts from fossil fuel-related activity will eventually trend towards zero. Revenue from fuel duty is projected to decline from 1.2% of GDP in the middle of the decade to 0.2% by the 2040s, and revenues from vehicle excise duty will also fall. The Government are committed to ensuring that revenue from vehicle taxes keeps pace with that change, with taxation simultaneously remaining affordable for consumers. That will ensure that we can continue to fund the public services and infrastructure that people and families across the UK expect. In considering how to replace those lost tax revenues, the Government will also consider the secondary impacts of existing vehicle taxes, not least in reducing road congestion.

Does the Minister agree that the principle of all new taxation has to be that we disincentivise people from using their cars and incentivise more use of public transport? Ultimately, that is the most sustainable way to go forward.

I am sure the hon. Lady will recognise that we have a medium-term fiscal plan coming up in about 10 days, and at this stage we will not commit to anything ahead of that plan.

I conclude by thanking the hon. Member for Bath for the opportunity to have a fruitful discussion about vehicle taxation. We are all aware of how important the issue is, given the fact that motoring taxes account for 4.3% of total tax take and £35 billion—a significant sum. We are also all aware that our constituents have a strong interest in any changes to vehicle taxation. I welcome the widespread support that hon. Members have expressed for using vehicle taxation to facilitate our transition to net zero, and I am grateful that so many hon. Members appreciate the need to reform vehicle taxation to maintain tax receipts while achieving net zero. We will listen to our constituents and to hon. Members as we continue to refine vehicle taxation and adapt it to the Britain of net zero, economic growth and fiscal responsibility.

Question put and agreed to.

Sitting suspended.