Vehicle Excise Duty

What is Vehicle Excise Duty?

Vehicle Excise Duty (VED) is an annual tax on the ownership of road vehicles, frequently referred to as "car tax" although it applies equally to vans, lorries and motorcycles.

The duty is administered by the Driver and Vehicle Licensing Agency (DVLA). Owners of vehicles who have paid the duty are issued with a "tax disc", which must be displayed prominently on the vehicle.

In the March 2012 Budget, the Chancellor announced that Vehicle Excise Duty would increase by inflation only and that VED would again be frozen for road hauliers.

Cars registered before March 2001 are subject to a rate of VED based on engine size. 

As from 1st April 2012, vehicles with an engine capacity of over 1549 cc are liable for an annual charge of £220.00; for vehicles with an engine size not over 1549 the charge is £135.

For cars registered on or after March 1 2001, the rate of VED is based in fuel type and CO2 emissions. This provides for a sliding scale of liabilities split into 13 bands ranging currently from a maximum of £475 per annum for petrol and diesel vehicles, down to £20 for the least polluting. Alternative fuel vehicles in this category qualify for a lower rate.

For new cars registered on or after 1st April 2010, different rates of vehicle tax will be charged for the first tax disc. These are known as 'First Year Rates' and range from £120 for a CO2 figure of 131-140 g/km to £1,030 for a CO2 figure of over 255 g/km. The aim of 'First Year Rates' is to make buyers fully aware of the environmental impact their new car will have. All subsequent tax discs will be charged at the standard rate.

Motorcycles are liable for charges of between £16 and £76 per year, depending on engine size. 

Tax discs can be purchased either for a year or for six months (with two six month discs working out as slightly more expensive than a full year one). If a vehicle is not taxed or declared off the road via a Statutory Off Road Notification (SORN), a fine of £1000 or more could be imposed on the registered keeper.

Disabled drivers are exempt from VED.

Background

Road vehicle ownership had been taxed since the earliest days of motor vehicles, with the UK's first schemes for "light locomotives" introduced in 1896. Under the Motor Car Act 1903, all road vehicles were taxed annually at a rate of 20 shillings per year, with the system administered by county councils.

The Finance Act 1910 replaced the earlier system with the "Road Fund tax", based on a scale of liabilities based on horsepower rating, formulated by the Royal Automobile Club and subsequently referred to as the "Treasury rating". The Act stipulated that the funds raised should be used for maintaining the road network. The fund was administered by the Roads Board, which had considerable difficulty spending the money it raised, until it was replaced by the new Ministry of Transport in 1919, which abolished petrol duties and increased vehicle duties. The tax disc was first introduced in 1921, under the Roads and Finance Act 1920, which set the duty at £1 per horsepower. The UK Road Fund remained in place until 1937; when it was abolished the hypothecation of vehicle duties for roads came to an end. Responsibility for vehicle licensing was passed from county councils to the Driver and Vehicle Licensing Centre in 1965.

The "Treasury rating" system remained in place until 1948, when it was replaced by a flat rate Vehicle Excise Duty charge of £10 per annum. This flat rate system remained in place until 2001, when the present emissions-based banding system was introduced. By this time, the UK was the only country in Europe not to charge motorists on the basis of some characteristic of their vehicles.

Controversies

Since its switch to an emissions-based graduated system, many have suggested that Vehicle Excise Duty is obsolete, insofar as it is pursuing the same objective as fuel duties. It has been suggested in many quarters that VED should be abolished, and fuel duties increased accordingly, insofar as the price of fuel has a greater incentive effect on reducing emissions. This argument gains force from the fairly small reductions in VED available to those who switch to more environmentally friendly vehicles.

The government and supporters of VED dismiss this argument, however, insisting that VED performs an important other role in underpinning the system of vehicle licensing, and paying for its enforcement. It also plays a vital role in ensuring compliance with MOT and insurance certification and discourages the ownership of second cars, it is argued. VED also reflects some costs that fuel prices do not, such as the extra damage to roads done by heavy lorries, they insist.

Nevertheless, addressing this latter issue is one of the principal motivations behind the shift to a Lorry Road-User Charge for HGVs. It has been argued that such a move has been made necessary to address the growing number of foreign-registered lorries on British roads. This in itself, some claim, is due to British hauliers going out of business or re-registering abroad in order to evade VED and British fuel duties.

The Department for Transport has suggested replacing VED outright with a road user charge for all vehicles, but this is widely criticised on civil liberties grounds for the constant tracking of private vehicle movements it would require.

Many believe the cost of motoring in the UK to be too high, and although fuel duties bear the brunt of this resentment, VED is widely viewed as part of the problem. Environmentalists, however, argue the opposite - that motorists do not pay the full environmental costs of their activities.

VED evasion is also recognised as a serious problem, costing the Treasury large sums of money per year. Although this is the only problem associated with VED evasion as such, untaxed vehicles are also frequently not roadworthy (not MOT-certified) and their drivers are frequently uninsured. The problem of VED evasion is particularly severe in Northern Ireland, given the permeable land border and the differentials between the taxes imposed on British and Irish-owned vehicles.

Statistics

About 0.7 per cent of traffic on both British roads and roads in Northern Ireland was driving without a valid tax disc in 2011.

The lowest rate of evasion was seen in the bus (0.1 per cent) and goods vehicles (0.4 per cent) tax classes. The highest rate was seen in the motorcycle tax class (2.1 per cent). The private and light goods vehicle tax class (PLG), which accounts for about 89 per cent of all licensed vehicles, had an evasion rate of 0.7 per cent.

The overall rate of unlicensed vehicles ‘in stock’ in Great Britain in 2011 was estimated to be 0.7 per cent. This equates to roughly 249 thousand vehicles. This is down from the 307 thousand vehicles estimated for 2010.

It is estimated that VED evasion could have cost around £40 million in lost revenue in Great Britain in 2011/12. This is down from £46 million in 2010/11.

Some of this revenue will have been recovered through DVLA enforcement activity or through vehicle keepers back-licensing their vehicles.

Source: Department for Transport – December 2011
 

Quotes

"UK transport policy is standing at a crossroads. The decisions the current Government takes on transport to tackle the dual challenges of climate change and rising oil prices could have significant repercussions for many years to come...Friends of the Earth is calling on the Government to:
"Change direction on transport policy - and aim to rapidly move towards a low-carbon transport system.....Vehicle Excise Duty must be changed to make road tax on gas-guzzlers more expensive - and cheaper for greener cars..."

Friends of the Earth; from briefing on 'Fuel prices, transport and climate change' - 2011

"I am increasing Vehicle Excise Duty by inflation only.

"To encourage fuel efficient fleets, we will extend the 100 per cent first year capital allowance for low emission business cars, reduce the CO2 threshold for the main capital allowance rates; and increase the percentage list price of company cars subject to tax.

"I can also announce that I am again freezing VED for road hauliers."

Chancellor George Osborne; Budget speech – March 2012
 

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