When will government pull the plug on tax incentives for alternative fuel vehicles?

12 April 2017

Down the generations, Chancellors of the Exchequer have used tax incentives – reliefs, allowances and favourable tax rates – to encourage good behaviours and to discourage bad ones. Sometimes this works spectacularly well, for example individual savings accounts (ISAs). At other times, things go terribly wrong at a very early stage, for example the nil rate band of corporation tax encouraged so many self-employed people to incorporate their businesses that the incentive had to be unscrambled using horrible anti-avoidance legislation. And then there are those tax incentives which seem to start off well, but end up in a bit of a mess.

Diesel cars are a case in point. Recognising that mile-for-mile diesel produces less carbon dioxide than petrol, Gordon Brown introduced tax incentives for diesel cars including lower vehicle tax and lower fuel duty. While well-intended, it’s now recognised that pollutants from diesel engines endanger human health and are bad for the environment. As a result, the government is now expected to introduce a scrappage scheme for all diesel cars.

In addition, global efforts to combat global warming are driving the development of new technologies for alternative fuel vehicles, especially electric and hybrid cars. In the year to March 2017, 11,489 electric cars were registered in the UK, 1.4 per cent of the total 820,016 new cars registered in the same period. The number of new electric cars may not be huge, but it’s an important milestone and shows a 7.8 per cent increase YTD. Combine this increased demand with industry estimates that the cost of batteries for electric vehicles will have reduced by 40 per cent by 2025, and that the range of electric vehicles will be comparable with petrol equivalents in the same timeframe, and it’s clear that the future for motoring will be very different.

However, two strands of technology development have to come together to make this possible. First, the development of the cars themselves. Today employer-owned fleet cars are driving the demand, with businesses wishing to adopt low-emissions vehicles early to support their business values and enhance their reputation from a brand perspective.

Second, the creation of recharging facilities both on the road and in the home, ensuring of course that the nation’s power generation and distribution facilities can meet the increased demand. The National Grid predicts that 2020 will be a key milestone for increased demand.

Tax incentives are important in both developments, with many elements in common:

  • research and development tax relief;
  • patent box;
  • capital allowances;
  • low corporation tax rates;
  • capital allowances for employers providing vehicles and charging points for employees;
  • favourable benefits in kind regime for employees; and
  • no or low vehicle tax.

With demand set to increase as car and infrastructure technology improves, how will HMRC balance the books if tax yields drop as motorists turn to electric cars rather than petrol or diesel alternatives?

We can already see how the government is laying the groundwork for some of the existing tax incentives to be reversed. For example, registered keepers of cars which currently qualify for zero road tax still have to register online. This means that the same vehicles could be subject to road tax without the government having to change the registration arrangements.

In the same vein, the lowest-emission company cars were taxed at only 5 per cent of their list price from 2012/13 to 2015/16 inclusive. Already that figure is increasing, from 7 per cent in 2016/17, 9 per cent in 2017/18 and eventually 16 per cent in 2019/20. The planned increase is intended to:

  • act as a general discouragement to car-driving; and
  • mitigate the loss of road tax which would otherwise occur as petrol and diesel vehicles are replaced by electric cars.

So where does this leave us? Clearly, the UK must meet its climate-change obligations. Key aspects of this are a dramatic shift to low-carbon electricity generation, and the replacement of petrol and diesel cars with electric equivalents; and tax incentives have a crucial role to play in the development of the necessary technologies. The UK’s physical and economic health depends on this, so it is important that the tax incentives are kept in place for as long as reasonably necessary. When the time comes for them to be withdrawn, that withdrawal should be announced well in advance, with plenty of time for power companies, car manufacturers and distributors, employers and private owners, to adapt. The kind of knee-jerk withdrawal of a subsidy which we saw in the case of solar energy is definitely not the way to do it.

For more information please get in touch with George Bull, or your usual RSM contact.