Road charging could replace fuel duty

  • Changes needed to plug possible funding gap
  • Electric and economical cars means duties will fall
  • Tolls or road pricing could plug the financial loss

The way cars are taxed in the UK is in need of a radical overhaul that could come in the way of road charging and tolls, according to a report by the Institute of Fiscal Studies (IFS).

Funded by the RAC Foundation, the study recommends a widespread system of road pricing.

In the current system Vehicle Excise Duty – sometimes known as road tax – and fuel duty raise around £38bn a year.

The introduction of electric cars, such as the Nissan Leaf which uses no fuel and is exempt from road tax, and more fuel efficient and lower-emitting models means that this revenue is likely to start drying up.

The IFS reports that the Office for Budget Responsibility forecasts that the tax revenues from these duties will, at the current prices, fall by £13bn per year, by 2029.

In order to cover this hole in the funding with the current system the cost of fuel duty would have to increase by 50% claims the IFS. The solution, the IFS say, would be to charge drivers by the mile with higher prices in more congested areas.

These changes to road pricing would, according to the IFS: “Generate economic efficiency gains from reduced congestion, reduce the tax levied on the majority of miles driven, leave many (particularly rural) motorists better off and provide a stable long-term footing for motoring taxes without necessarily raising net additional revenue from drivers.”

If the plans were to go ahead, the potential fuel and tax savings from investing in an electric car could quickly disappear and owners may have to pay the same amount as a low-emitting, fuel efficient petrol or diesel car. This would then eradicate the initial reasons for purchasing the car.

Another issue facing potential plans is the success of the tolls and charging. The Government has already flirted with this idea before and been met by strong disapproval.

At the same time the M6 toll road has proved largely unsuccessful to date, with it falling well below the target usage. If the scheme was applied to only new roads, and not on existing routes, it could be hit by these same issues.