Osborne reforms vehicle tax, creates dedicated ‘road fund’

The chancellor of the exchequer, George Osborne has announced a major reform to vehicle excise duty (VED).

Osborne claimed that the previous system of basing VED payments on the basis of CO₂ emissions was regressive, penalised those who could not afford new cars with lower emissions.

Emission-based taxation will remain in place for the first year of a new car’s operation, with payments sliding from £10 to £2,000 depending on CO₂ emission levels.

After the first year system, the new VED system will see three taxation bands introduced: Zero emission, standard and premium. Only zero emission cars will remain exempt from VED, with cars classed as ‘standard’ charged £140 and those classed as ‘premium’ charged £310 a year.

Reacting to the government’s proposals, Mike Hawes, chief executive of the Society of Motor Manufacturers and Traders (SMMT) said: “While we are pleased that zero-emission cars will, on the whole, remain exempt from VED, the new regime will disincentivise take up of low emission vehicles. New technologies such as plug-in hybrid, the fastest growing ultra low emission vehicle segment, will not benefit from long-term VED incentive, threatening the ability of the UK and the UK automotive sector to meet ever stricter CO₂ targets.”

The Treasury has said that it will review the new VED system “as necessary” to “ensure that it continues to incentivise the cleanest cars”.

In addition, Osborne announced that all revenue raised from VED will be poured into a newly-created ‘road fund’ which will be spent on upgrading the UK’s road infrastructure. However, the creation of a road fund has been criticised by other users of Britain’s roads, most notably cyclists.

Roger Geffen, policy and campaigns director at the National Cycling Charity said: “George Osborne has today reversed Winston Churchill’s most sensible transport decision. Given this, it is therefore a relief that Parliament and the Prime Minister are already committed to cycling investment, and to ‘cycle-proof’ all road and traffic schemes to ensure cycling is properly designed into them from the outset.

“However, CTC still believes this is a doubly regressive policy, raising more tax from cleaner cars to build more roads, when councils are struggling to maintain the ones we’ve got.”