Government tax revenues are in danger of taking a severe hit, as the number of electric vehicle (EV) registrations continue to increase. As of October, battery electric vehicles (BEVS) equalled their September market share with an uptake of 15.2%, while plug-in hybrid electric vehicles (PHEVs)grew their shares to 7.9% according to data from the Society of Motor Manufacturers and Traders (SMMT).

As more and more electric vehicles join Britain’s roads, the potential shortfall due to loss of road tax is becoming ever more apparent. From 2019 to 2020, tax revenues from fuel duty accounted for 2% (£28.4bn) of the GDO, while vehicle excise duty receipts were estimated to account for£6.5bn.

New research from the Tony Blair Institute for Global Change suggests that for the average petrol or diesel car, the cost of petrol or diesel, fuel duty and VED is about £1,100 a year. For an electric vehicle it is£320, a 71% reduction.

In the long term, the Government’s EV deployment targets could see the Exchequer losing almost £260bn in revenue by 2040 according to the Institute. To replace this deficit, basic income tax would have to increase by approximately 6p in the pound, or 2p by the end of the next Parliament.

According to the Avoiding Gridlock Britain report from the Tony Blair Institute for Global Change, taxing the charging of electric vehicles to compensate for the loss in revenue could be difficult to implement. It could also damage adoption rates, causing regression in the vehicles uptake. Equally, the institute suggests that increasing the VED for purely electric and hybrid electric vehicles is not the answer when it comes to plugging the gap.

While the Treasury could look to recoup their losses by increasing VAT or income tax, this would contradict the ‘user pays principle ’by using the taxes from the general population to fund roads which not everyone will derive benefit from.

Instead, it has been suggested that the Government could support the expansion of tolls, congestion and air quality charges. Equally, they could also introduce a ‘road pricing policy’ which would see users paying for the use of their vehicle, rather than its ownership. According to Venson Automotive Solutions, an alternative road tax system based on distance travelled was supported by 53% of motorists who participated in their research earlier this year.

Implementing this approach would not only help supply the Government with income for infrastructure spending, but also help them address other objectives, including managing congestion, and improving air quality.

While ministers are currently discussing road pricing options, Toby Poston, director of corporate affairs at the British Vehicle Rental and Leasing Association told the committee at a recent session in the House of Commons ‘Any new road pricing scheme must be easy to pay and have the simple objective of providing a revenue-neutral replacement for fuel duty and VED.’

This was echoed by Fleet decision-makers at a recent FleetNews roundtable, who called for a solution that replaced rather than added to existing taxation. Steve Winter, British Gas head of fleet, said: “It can’t bean administrative burden or an additional tax burden. We just need a formula we can understand and a long-sighted strategy view.”

Adopting a ‘road pricing policy’ which is based on vehicle usage could also help prevent congestion increasing according to the Tony Blair Institute report.

The improvement of fuel efficiency and the decision to retain the fuel duty freeze could lead to another 400,000 cars on the road by the end of Parliament. Similarly, the forecasts for electric vehicle usage could result in a 30% increase in traffic, and a rise in the proportion of miles driven in congested conditions up to 12%.

Action to combat the higher volumes of traffic, and replace the deficit in Government funds are needed, with Simon Staton, Venson client management director stating the Chancellor is currently under pressure to outline a 10-year trajectory to establish a financially viable means to achieving zero emissions. Staton added “Our survey findings confirm an understanding by the public that some sort of EV tax or related user charges will be necessary, which should offer Government assurances that people are mentally preparing to make the switch,”

When it comes to pulling the whole scheme together and cementing the uptake of electric vehicles, in a way that is sustainable both environmentally and financially, the decision relating to ‘road pricing policy ’will be instrumental. As the charging networks and number of available models grow, adding a fair and favourable tax regime that is easy to implement for employers as well as individuals will only help to further accelerate the uptake of Evs and help the country on their road to zero emissions.