UK Politics

Treasury seeks views on future of Vehicle Excise Duty

Toyota Prius
Image caption Hybrid cars like the Toyota Prius are exempt from VED

Reforms to Vehicle Excise Duty are currently under discussion, the Treasury has said.

It follows reports that increased fuel efficiency could lead to a fall in revenue from the tax, which is levied according to how much CO2 a car emits.

The Treasury said no proposals had yet been made and it would listen to the views of motoring groups before taking any decisions.

Labour said the government was planning a "stealth tax hike" on motorists.

The Daily Telegraph reported one option under consideration by ministers was a one-off up-front charge on new vehicles when they were sold, instead of charging VED annually.

Under the current system, cars fall into 13 payment bands depending on their level of carbon emissions, with more polluting vehicles taxed more heavily.

The duty is paid annually, but a higher rate is payable in the first 12 months of the vehicle's registration.

Cars with the lowest levels of carbon emissions, such as hybrid cars registered in or after March 2001, are exempt from paying the duty.

European regulations aimed at reducing carbon emissions from new cars and improvements in technology are expected to lead to a higher proportion of cars qualifying for the lower bands of VED in the future.

'Stealth tax hike'

The latest forecasts from the Office for Budget Responsibility show that while tax receipts for VED are expected to remain broadly flat at about £6bn a year over the next five years, they could fall as a percentage of GDP from 0.4% in 2010-11 to 0.1% by 2029-30.

"Beyond 2030, with unchanged emissions bands, VED would fall off to very low levels as older cars with emissions levels above the exempt level dropped out of the car stock," the OBR said.

Speaking in the House of Commons earlier in May, Treasury Minister Chloe Smith said: "The government announced in the Budget that they will consider whether Vehicle Excise Duty should be reformed to support the sustainability of public finances and to reflect the improvements in vehicle fuel efficiency.

"The government will, of course, seek the views of motoring groups before taking any decisions," she added.

But for Labour John Woodcock, shadow transport minister, said the government should "come clean" on whether it plans to raise the duty.

"Instead of tackling the soaring price of fuel, the chancellor has hidden plans for another stealth tax hike on motorists in the small print of the budget.

"The Conservative-led government must come clean about how much extra they plan to charge hard-pressed motorists by whacking up the rate of vehicle excise duty", he said.

In the Budget George Osborne announced VED would rise by inflation, but road hauliers would be exempt from the increase.

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