Electric vehicle sales hit speed bump as tax changes bite

The latest new car registration data from The Society of Motor Manufacturers & Traders for April reveals that despite government’s commitment to achieving net zero, the rise in battery electric vehicle registrations (BEV) pushed market share to 20.4%, which is still well below the 28% target under market regulations. The 2025 target, which represents a c.40% increase on the current baseline, therefore seems somewhat unachievable.

Although government’s recently proposed amendments to the Zero Emission Vehicle (ZEV) Mandate are designed to ease the net zero transition for manufacturers and fleets, the mandate only briefly mentions the lack of infrastructure to counter range anxiety and ensure regular access to charging, especially for consumers without access to street parking. Long wait times and patchy availability of rapid chargers have long frustrated drivers, and more investment is required to make electrical vehicles (EVs) as convenient to refuel as traditional cars.

In addition, EV drivers are hit by the inconsistency of tax rates when charging, with a 15% arbitrage between public charging points (20%) compared to the 5% VAT domestic charging rate. A levelling of the tax rate for the same commodity could incentivise behaviour and boost demand.

Against the backdrop of challenging road infrastructure and inconsistent VAT rates, fuel duty receipts also decreased by £0.2bn in the year to April 2025 to £24.7bn, with the additional loss of revenue due to drivers switching to EVs.

Funding the incentives and investment for EVs is a difficult balancing act. With dwindling fuel duties and no replacement scheme announced to help boost the lost earnings, it is unclear where additional funding could be sourced for the much-needed investment and incentives.

Fuel duties are the second highest indirect tax revenue generator for the UK tax purse after VAT, having contributed as much as 8% (inclusive of VAT) to the annual tax revenues received between 2004 and 2014. This is an important source of revenue, but it has been on a steady decline, contributing closer to 4% (inclusive of VAT) to the total UK tax revenue over the last four fiscal years. The Office for Budget Responsibility (OBR) reported that the cumulative cost of freezing fuel duty rates between 2010/11 and 2025/26, including the 5p cut introduced in 2022, currently stands at about £100bn.

The introduction of the new Vehicle Excise Duty (VED) rules which came into effect from 1 April is one example of the government’s attempt to fill the hole left by the declining fuel duties. The VED changes impact all new cars, as well as the Expensive Car Supplement which is applicable to many new EVs (worth over £40,000), adding further costs on top of the price of EVs. This may account for some of the uptick in new BEV registrations in March – trying to beat the price hike.

The current price point of EVs may be unaffordable for many and driving consumers to seek out cheaper options, which may be why overseas brands are increasingly dominating the market. Furthermore, the various announcements regarding US tariffs have increased uncertainty and may lead to higher costs for UK manufacturers, which may be passed onto consumers, making EVs potentially even more expensive.

In the short term, the UK and EU have agreed to extend trade rules on EVs until the end of 2026, to protect manufacturers and consumers from higher costs, alongside more flexibility in the ZEV Mandate to give manufacturers more time to meet targets until 2035. However, if the government is serious about making EVs an attractive and affordable option for road users, it may need to revisit tax changes introduced to balance the books. To incentivise consumers, exemption of EVs from the Expensive Car Supplement and at least reducing the VAT charged on the sale of new EV cars could be a good place to start.