Select Committee on Environmental Audit Tenth Report

New first-year rates

39.  In his Budget speech, the Chancellor described the new first-year rate of VED as follows:

[…] for new cars, from April 2010 there will be a new first-year rate based on carbon dioxide emissions of the car. Cars that emit less than the proposed 130 grams per kilometre European standard of carbon dioxide emissions will pay no car tax at all in the first year. But a higher first year rate will be introduced on the most polluting cars. Cutting taxes for those who cut carbon emissions. But it is right that if people choose to buy a more polluting car that they should pay more in the first year to reflect the environmental cost. The changes will provide a real incentive to manufacturers and motorists.[35]

This means, for example, that a new car in Band L (226-255g/km) will pay £750 in its first year, as opposed to an ordinary annual rate (i.e., charged on a Band L car bought the previous year) of £430. Meanwhile, a new car in Band D (121-130g/km) will pay nothing in its first year, as opposed to an ordinary annual rate of £95.[36]

40.  The new first-year rate was not popular with the motoring organisations we spoke to. Paul Everitt, chief executive officer of the SMMT, said:

[…] the introduction of a first year rate of VED, we felt directly challenged what we think has been a long held principle that vehicle taxation has focused predominantly on the use of vehicles rather than on their ownership. We also feel that the introduction of this kind of measure makes the system inherently unstable. That is to say, I am sure that for a variety of reasons, chancellors will make decisions on what those rates should be on a year by year basis, therefore depriving us as vehicle manufacturers of a longer term planning horizon as to the type of products we are going to put into the market and how successful they might be. I also think for the consumer, it is providing them again with uncertainty as to whether or not they are making sane and sensible choices, which I think is unfortunate. Clearly, in our view, some of these measures were introduced to raise revenue.[37]

41.  We do not quite understand the SMMT's first point, which argues in principle against basing taxation on vehicle ownership rather than use. VED has always been based on vehicle ownership; and the SMMT says it supports the varying of VED bands according to CO2 emissions.[38] The new first-year rate, moreover, is aimed specifically at influencing which model to purchase, rather than being a levy on the car one already owns. As for its second point, that future chancellors may alter the first-year rates from year to year, and thus exert a fluctuating and unpredictable influence on the new car market, this has always applied to VED, as indeed it does to any tax. Furthermore, the overall direction, both for successive chancellors and for car manufacturers and sellers, ought to be very predictable, with a new EU target in the offing to reduce the average emissions of new cars in Europe down to 130g/km by 2012-13. Indeed, Paul Everitt confirmed: "We are happy to work with the Commission on the new regulation and, as you say, 130 grams per kilometre is quite a challenging target but one that we are committed to meeting."[39]

42.  Recently there has been growing interest in the idea of introducing a purchase or "showroom tax" on new cars, using the tax system to influence purchasing decisions more directly than through annual VED charges. The new first-year rate of VED would seem to offer many of the advantages of a showroom tax, while retaining the strengths of the VED system. The advantages it would share with a showroom tax are that it is targeted specifically at influencing the choice of which vehicle to drive, plus it is a one-off charge, meaning it is feasible to set it at a higher rate than an annual levy. The disadvantage of a showroom tax is that it would be possible to escape it by buying a car in another country; but a first-year rate of VED would still have to be paid, no matter where a vehicle was purchased, in order for it to be licensed in the UK.

43.  One issue about the first-year rate that concerns us, however, is how visible it will be at point of purchase. In particular, we are concerned that car showrooms may incorporate the tax into the purchase price, and complete the process of getting the car taxed for its first year on behalf of the purchaser, so that the first-year VED charge does not in practice impinge on the consumer's purchasing decision. The Exchequer Secretary was not able to offer us too much reassurance:

That is a matter for the retailers and their pricing decisions. There is not always an easy, linear relationship between a tax and what the price of the good is at the end. We have the same issue with alcohol. All we can do is give the signal. I hope the innovations which Julia King talked about in her report on labelling and making that more up front [e.g., colour-coded license discs] will also assist in people becoming more aware of the CO2 emissions values of their car.[40]

This concern is of course reduced if VED differentials for second-hand vehicles are as wide as they are for new ones. We recommend the Treasury looks again at what more it could do to ensure that the first-year VED rates are prominently displayed before and at point of sale, and not simply incorporated into an "on the road" price.

44.  A related concern was raised by the SMMT and RAC Foundation, who worried that increasing the number of bands to 13 would make the labelling system too complicated to be effective. Paul Everitt told us:

We introduced an energy efficiency style label into all new car showrooms alongside new cars, so we have the various bands from green to red. Each one shows the emissions of the vehicle that it is next to. Now we are going to have to work out how we reflect those 13 bands but also there are going to have to be two sets of prices, one for the first year rate and one for the ongoing rate. When you look at purchasing a new car, we will have a first year rate of VED, an ongoing rate of VED, a first registration fee, VAT and then charges that may come with the delivery or inspection of the vehicle and that kind of thing.[41]

Stephen Glaister shared these concerns, saying it was "an open question whether this can be successfully communicated to a population […] for whom the evidence is they really have little understanding or interest in the environmental performance of cars, generally speaking."[42]

45.  We support the Treasury's decision to increase the number of VED bands, so that it reflects more accurately the emissions of different models. This should increase the numbers of similar types of car that are placed in different bands, clearly illustrating to prospective buyers which models are the most fuel and carbon efficient. The Treasury must address concerns that the new system of VED will make the efficiency labelling of cars too complicated to impact on the public in practice. We recommend it undertakes research and develops guidance and publicity to inform traders and consumers.

46.  Overall, our main concern about the new first-year rate is that the differentials between bands are still not large enough to encourage a step change towards the purchase of lower emission models. In our last substantive inquiry on this subject, we heard evidence suggesting that to make a real difference to purchasing decisions, VED ought to go up in £300 jumps to a top band of £1800. The top band proposed for the new first-year rate is barely half that at £950. We put it to the Exchequer Secretary that the top band ought to start nearer to £2000. She replied: "I do not think that is right." She went on to explain that it was more "important that we can move the bulk of those who are driving down [to more efficient models] rather than smaller numbers of people driving bigger cars".[43] Paul Everitt of SMMT made the same argument:

To a degree, […] it is important that we get those low emitting vehicles into the market place but the low end and the high end are relatively negligible in the overall impact. What is more fundamental is the bulk of vehicles in the mid range where millions of vehicles are being purchased each year, moving consumers in that area down five bands. […] If those 400,000 plus, if that is the right number, had a five gram less emitting car, the total impact would far outweigh anything you did at the very, very low end or anything you did at the very, very high end. For us as an industry, that is where we feel we should be targeting action […].[44]

47.  We welcome the new first-year rates of VED. By setting these at a higher rate than the standard annual VED for high emissions cars, while reducing it to zero for all lower emissions cars, this should have a more pronounced influence on purchasing decisions than the previous graduated VED system. Whether the new first-year differentials are large enough to have much effect, however, is still uncertain. They are still smaller than previous modelling by the Sustainable Development Commission. We recommend the Treasury commission research on the impacts, on purchasing decisions and carbon emissions, of implementing a range of different first-year rates of VED.

48.  The King Review has highlighted that the biggest short-term carbon savings would come from shifting the market towards the "best in class" for each type of car, especially in the middle VED bands which make the bulk of cars sold. Unlike other forms of transport, such as aviation, very significant cuts in emissions from cars could be made extremely rapidly, if prospective buyers could be persuaded consistently to choose the most efficient models in each class that are already on the market. That the Government could achieve this without stopping people driving, merely directing their choice of vehicle to the most efficient available, provides a strong argument for market intervention—larger differentials and bigger incentives—that could be robustly conveyed to the public.

49.  At the same time, to develop the market for very low emissions cars, we further recommend that the Treasury examine the merits of some kind of "feebate" system, similar to the "bonus/malus" scheme in France, in which levies on high emission cars are accompanied by subsidies on low emission cars.

35   HC Deb, 12 March 2008, col 297 Back

36   HM Treasury, Budget Report 2008, Chapter A, Table A.8a, p 122 Back

37   Q4 Back

38   Ev 2 Back

39   Q22 Back

40   Q74 Back

41   Q28 Back

42   Q27 Back

43   Q113 Back

44   Q28 Back

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