UK ban on fossil fuel vehicles from 2040 raises fuel duty questions

Focus article by Sarah Trinder

LONDON (ICIS)–The UK’s proposed ban on new diesel and petrol vehicles from 2040 onwards raises questions about fuel duty revenues, according to industry sources on Wednesday.

“The ban on new diesel and petrol vehicles from 2040 is the death knell for fuel duty revenues. This will leave a big hole in the Treasury’s coffers,” Kevin Nicholson, head of tax at PricewaterhouseCoopers (PwC) said.

“Fuel duty currently accounts for 4% of UK tax receipts, bringing in nearly £28bn this year. In comparison, Stamp Duty Land Tax brings in about half that amount, and council tax raises £30bn.”

He continued that fuel duty revenues have been decreasing for a while as a result of higher levels of fuel efficiency in vehicles.

“The OBR [Office for Budget Responsibility] has forecast fuel duty revenues will decline by about 0.5% of GDP by 2021/2.  No doubt recognising the need to keep tax receipts steady, the Government has stated that from 2018/19 the main rate of fuel duty will rise each year in line with the RPI index (fuel duty has been frozen since 2011).  These rises will be pretty meaningless once petrol and diesel car production stops,” he added.

“Environmental policy can’t be dictated by tax. But today’s announcement does mean the Government will need to find alternative sources of tax revenue. And it would be a mistake to simply look for ways to plug the hole left by fuel duty,” Nicholson said.

Elsewhere, Brian Madderson, chairman of the Petrol Retailers Association (PRA), also questioned where the UK government would recover the expected loss in fuel duty revenues.

“In the longer term, the Treasury stand to lose up to £20bn of fuel duty and VAT tax income every year if retail sales of petrol and diesel evaporate. What are their plans for replacing this significant contributor to the national budget? Are EV’s [electric vehicles] suddenly going to bear the brunt of the shortfall?”

A player in the biofuels market also pointed towards the fact that gasoline and diesel raise a significant income for the UK and questioned the impact on biofuels.

“There’s so much excise [duty] involved on gasoline and diesel, which raises a lot of income for the state…Now you’ve had a tax advantage on hyrbids or electric cars, that will disappear, and make it [the pull towards hybrid and electric vehicles] less attractive,” the source said.

“There’s a huge agricultural sector in Europe and the US, benefiting from biofuels so I think [it’s] an important industry in Europe and US…Not sure how that will develop,” the source added.

The UK ban is part of a government plan to reduce air pollution.

The move follows a similar announcement made recently by France’s environment minister Nicolas Hulot, in which he said that France plans to ban all petrol and diesel vehicles by 2040.

In June, Norway said that it plans to ban all fossil fuel-based vehicles by 2025, although this has not yet been set into law.

The UK government has also announced a fund of more than £200m for local authorities to lower emissions from diesel vehicles.

Additional reporting by Vicky Ellis and Samantha Wright