Motoring tax needs revamp to avoid ‘£35bn black hole’ as drivers switch to electric cars, MPs warn

MPs are calling for a new motoring tax for electric cars to avoid “zero revenue” by 2040

The UK needs to urgently develop a new motoring tax to address the decline in revenue as more drivers switch to electric cars, MPs have warned.

The Transport Select Committee said there is likely to be “zero revenue” from existing motoring taxation by 2040 and the system needs to change to reflect the move towards greener vehicles.

Pure electric cars are exempt from road tax and fuel duty (Photo: Getty Images)

A £35bn annual loss in revenue

The sale of new petrol and diesel cars and vans will be banned in the UK from 2030, and together, vehicle excise duty and fuel duty raise around £35 billion per year, according to the report.

However, pure electric cars are exempt from road tax and motorists do not have to pay fuel duty either.

The parliamentary committee said: “Policies to deliver net zero emissions by 2050 are likely to result in zero revenue for the government from motoring taxation by 2040.

“In addition to generating taxation to fund essential public services, motoring taxation plays a key role in managing congestion by regulating demand to use public roads.

“If the government fail radically to reform motoring taxation, the UK faces an under-resourced and congested future.”

Calls to establish a new tax

The committee urged the Treasury and the Department for Transport to have an “honest conversation” about how to maintain investment in roads and public services, particularly as the UK moves towards vehicles that do not pay towards these two motoring levies.

It urged the departments to work together to set out their preferred options for replacing the taxes, and establish an arm’s-length body to recommend which one to proceed with by the end of the year.

The report said it has not seen a “viable alternative” to a road pricing system which uses technology to track the movement of vehicles and charges drivers based on distances gathered.

Such a scheme could factor in the type of vehicle and congestion, and support vulnerable groups such as those with mobility issues, and people in remote areas.

MPs insisted that motorists should pay “the same or less” than under current taxes.

Figures from the Society of Motor Manufacturers and Traders show plug-in vehicles accounted for more than one in six new cars registered in the UK last year.

The report warned that “the situation is urgent” and called for work to “begin without delay.”

Tory MP Huw Merriman, who chairs the committee, said the UK faces a “£35 billion black hole in finances unless the government acts now”.

He said: “That’s 4% of the entire tax-take. Only £7 billion of this goes back to the roads; schools and hospitals could be impacted if motorists don’t continue to pay.

“We need to talk about road pricing.

“Innovative technology could deliver a national road pricing scheme which prices up a journey based on the amount of road, and type of vehicle, used.

“Net-zero emissions should not mean zero tax revenue.”

RAC Foundation director Steve Gooding said the “silver lining of zero-carbon motoring comes wrapped in a cloud of trouble for the Chancellor”.

He said: “Drivers choosing to go electric deserve to know what is coming next – particularly if the promise of cheap per-mile running costs is set to be undermined by a future tax change.

“If the Treasury is thinking it can leave this issue for another day but still recoup their losses from electric vehicles they risk a furious backlash from drivers who made the choice to go electric expecting to save money.”

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