Select Committee on Transport, Local Government and the Regions Appendices to the Minutes of Evidence

Memorandum by HM Treasury (TYP 61)


  The Government is committed to a fair and efficient tax system. This includes using taxes with an environmental dimension (as set out in its Statement of Intent on environmental taxation) and using taxes, where appropriate, to support other policy instruments. This includes using tax to support the achievement of objectives relating to transport. The Statement of Intent recognises the "polluter pays" principle and the benefits of shifting taxation from "goods" (such as employment) to "bads" (such as pollution), while also noting the need to take social, environmental and economic implications into account. These factors are all important in taking decisions on taxes, including taxes relating to transport.

  Although the approach to each area of taxation will vary according to these factors and to the way a specific tax works, some general points can be made about taxes relating to transport:

    —  first, tax measures can affect overall demand for road transport (and hence both congestion and some environmental impacts), especially if related to the marginal cost of transport;

    —  second, tax policies can encourage the use of cleaner, less-damaging, and more fuel-efficient vehicles, engines and fuels, both in the short and long-term;

    —  third, tax can also affect the affordability of road transport with an important consideration being, alongside other transport costs, the fixed cost of vehicles ownership especially for lower-income households;

    —  fourth, taxes remain only one element to consider.

  The relationship between taxation and the achievement of objectives and targets described in the 10-year Plan for Transport can be described in relation to decisions taken on taxation since 1997, under the five headings set out by the Committee.


  The level and structure of fuel duty has a series of implications for transport. The level of fuel duty feeds into the price of fuel and hence affects demand for fuel. The relative levels of duty on different fuels can affect relative demand.

  A series of possible effects can be considered:

    —  first, the overall level of fuel duty will affect overall demand for road transport;

    —  second, the overall level will also, especially over time, stimulate more fuel-efficient road transport (in the sense of using less fuel for the same journey). This could take the form of more fuel-efficient engine and vehicle technology; more fuel-efficient driving behaviour; or more efficient use of haulage such as minimising empty loads;

    —  third, relative levels of duty on different fuels can encourage a shift into lower duty fuels—as witnessed with road fuel gases, which have attracted lower rates of duty, following the Green Fuel Challenge, and have seen their use increase substantially.

  These in turn have a series of possible implications for the achievement of transport-related objectives, potentially contributing to:

    —  restraining demand and hence in some circumstances congestion;

    —  meeting targets for the emissions of carbon dioxide, which contributes to global warming: between 1996 and 1999 the fuel duty escalator is forecast to reduce carbon emissions by 1 to 2.5 Mt carbon per year by 2010;

    —  meeting targets for local air quality (through lower-sulphur fuels and compressed natural gas for example)—the duty differential in favour of ultra-low sulphur petrol is estimated to have reduced nitrogen oxide emissions by 1 per cent per year and carbon monoxide by 4 per cent per year between 2001 and 2004.


  The Government believes that for reasons of fairness, efficiency and competitiveness, all lorries, regardless of nationality, should pay to use UK roads. The Transport Sub-Committee in 2001 recommended that the Government introduce a charge to be levied on all hauliers, including foreign operators entering the UK, in order that they should meet at least part of the cost of repairing the damage they cause to our roads and environment. It also said that it broadly supported the principles which have underpinned the Government's taxation policies towards the road haulage industry, although such policies should be applied in a sensible and pragmatic way. The Government launched a consultation on the form of the lorry road-user charge with the November 2001 Pre-Budget Report, "Modernising the Taxation of the Haulage Industry". The possible relationship between such a charge and transport and environmental objectives depends on the nature of the charge; some considerations are set out in the consultation document. The consultation also recognises that the UK haulage industry already contributes towards the costs that it imposes in the UK, and therefore its tax burden should not increase.


  A series of reforms to car and lorry VED have shifted the burden of taxation from ownership to use. The Government is currently consulting on reforms to motorcycle VED in the context of the principles adopted for those previous reforms.

  Changes in the level and structure of VED can have two important implications:

    —  first, the overall level of VED can affect the affordability of transport, through the fixed costs of car ownership, without affecting the marginal costs;

    —  second, the structure of VED can encourage the development, marketing and purchase of vehicles which help meet the Government's transport-related objectives such as:

      —  meeting targets for carbon dioxide emissions (as in the case of graduated car VED);

      —  meeting targets for local air quality (reflected in reductions in lorry VED for vehicles with reduced pollution certificates);

      —  reducing road wear and tear (lorry VED based on weight and axle configuration).


  Company cars are regarded as a benefit-in-kind for both income tax and national insurance purposes. Rather like VED, company car tax can create incentives for less polluting vehicles, as will be the case for the reformed system to be introduced in April 2002. A reformed company car tax system can also remove the incentive to drive extra business miles, reducing congestion and carbon emissions. The forecast impact of this policy is to reduce carbon emissions by between 0.5 to 1 Mt carbon in the long run.

  Further related reforms include:

    —  first, an increase in fuel scale charges to discourage the use of free fuel by employees (which otherwise means they face no marginal cost of driving for personal use);

    —  second, charges to authorised mileage rates, to make the new company car tax regime more effective; to create incentives, for employees to choose more fuel-efficient cars; while allowing those employers who need to drive their own car for business purposes to be able to receive fair reimbursement for it.


  Employers can help reduce the impact of transport, including commuting. The tax system can play a role in supporting this in some circumstances, complementing other policy instruments. The Inland Revenue and DTLR have commissioned joint research in this area. The Government has introduced tax measures to support action in this area and has been consulting on further steps relating to employer-provided buses.

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