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  • Writer's pictureSara White

CPS calls for mileage tax on electric cars

Updated: Mar 21

Electric vehicle drivers should be charged on a pay as you go basis for every mile driven to ensure they contribute to the tax coffers.

Sara White, Editor, Accountancy Daily

In 2021/22, drivers paid £25bn in fuel duty set at 52.95p per litre which is then liable for 20% VAT, while road tax raised £8bn. But the government spent only a third on road construction and maintenance with £5.4bn on national roads and £6.4bn on local roads in the same period.

With government plans to encourage drivers to move to electric vehicles with an aim of having a quarter of vehicles electric by 2030, the Treasury will be hit by rapidly diminishing tax revenues from petrol and diesel fuel duty.

The Centre for Policy Studies (CPS) suggests introducing a pay as you drive scheme for zero emission vehicles (ZEVs), becoming the only form of motoring taxation for those vehicles. However, the think tank has not set out examples of how the rate per mile would be calculated.

Currently EV drivers pay no road tax but they will have to pay £160 vehicle excise duty from April 2025. That measure is expected to raise £515m in 2025-26, rising to £1.6bn in 2027-28.

Under the CPS proposal, ZEVs would be charged a flat rate for every mile they drive – but would still pay significantly less than their petrol and diesel counterparts. While everyone would receive a set allocation of tax-free miles every year, the allocation would be higher for those living in remote areas with fewer transport alternatives.

The CPS envisages that each vehicle would be assigned a per mile rate, based on its weight (to reflect wear on the roads). Charges would be collected monthly by direct debit and would operate nationwide. At the moment electric and hybrid vehicles accounts for a tiny percentage – 3% – of total road transport with only 660,000 electric and 445,000 hybrid out of 33 million registered cars.

The government’s carbon budgets assume that ZEVs will make up 25% of the total car fleet by 2030, and 52% by 2035.

Eventually, as the share of ZEVs on the roads grows, this new per mile charging system could completely replace fuel duty and vehicle excise duty for all vehicles – exchanging an outdated and onerous tax system with something ‘future-proof’ and much fairer towards drivers.

CPS research found that ‘neither of these key reforms will succeed if they are seen as a ‘stealth tax’ or as a way to force people out of their cars. Voters are instinctively wary of changes in motoring taxation, particularly after the U-turn on diesel vehicles’.

‘This system is not fair for drivers or the general public, who suffer the consequences of polluting vehicles through negative health outcomes,’ the CPS said.

‘The Treasury has grown used to motorists being a cash cow, but with electric vehicles on the rise, those days are numbered,’ said Tom Clougherty, CPS research director and report co-author.

‘We shouldn’t replicate the old, punitive tax system, but it is still important that all drivers pay a fair amount for the roads they use. The ‘pay as you drive’ approach our report recommends would meet that objective and could be phased in gradually over the next decade or so – alongside targeted, local initiatives to manage congestion and reduce air pollution.’

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