House of Commons - Taxes and charges on road users

Taxes and charges on road users - Transport Committee Contents

2 Are motorists overtaxed?

Revenue from taxes and charges on road users

18. In response to our simple question, "What taxes and charges are currently paid to Government by road users and how much do they raise?" various bodies cited very different figures. For example:

The Chartered Institute of Logistics and Transport: £28 billion, comprising fuel duty and VED;[14]
HM Treasury: £32.8 billion, including £2.5 billion of company car tax;[15]
The Automobile Association: £46 billion, including Value Added Tax (VAT) and business motoring taxes;[16]
The National Association Against Tolls: £50-57 billion, including taxes on oil companies and car repairs.

19. These differences result from differences of opinion as to what should be included in the calculation. Some count VAT, insurance premium tax and certain other general taxes as 'road user' taxes. We show the amounts raised by these taxes and charges and their broad transport impacts in Table 1.

Table 1: Principal taxes and charges paid by UK road users, and revenues raised

Tax or Charge Revenue raised £billion per annum (gross)¹
2007-08
Main transport impact

Taxes and charges specific to road users

Fuel duty 24.9 Reduce vehicle mileage and encourage fuel efficiency.

Vehicle Excise Duty 5.4 Encourage purchase of more fuel-efficient vehicles.

Tolls (bridges, tunnels, M6 Toll, etc) 0.3² Fund specific infrastructure and manage demand.

London congestion charge 0.3³ Reduce traffic and congestion in central London; fund transport infrastructure and services.

Total specific to road users 30.9

General taxes paid by road users

VAT on fuel 6.8⁴ Reduce mileage and encourage fuel efficiency.

VAT on vehicle sales 6.9⁵ Reduce rate of new vehicle purchase.

Insurance premium tax 1.0 No specific transport impact.

Company Car Tax and Fuel Benefit Charge^{6, 7} 2.5 Encourage purchase of more fuel-efficient vehicles.

Total general taxes 17.2

Total paid 48.1

Notes and sources

1. Figures rounded to nearest £0.1 billion. Main source is HM Treasury Ev 219

2. Estimated by National Alliance Against Tolls—Ev122

3. TfL, Central London Congestion Charge: Sixth Annual Monitoring Report, July 2008, p220

4. Figure provided by the RAC - Ev 172. According to HM Treasury (Ev219),"HMRC does not collect data on VAT in a way that allows for isolating road users".

5. Figure provided by the RAC - EV 172.

6. This is the element of Income Tax and National Insurance Contribution paid on the benefit in kind derived from the provision of company cars and company fuel.

7. Figure is for 2005-06

20. Professor McKinnon and Ms Maja Piecyk of Heriot-Watt University noted how academic studies vary in terms of their treatment of VAT:

In our study of the internalisation of HGV [heavy goods vehicle] costs we included VAT on the grounds that it is passed down the supply chain and ultimately borne by the final consumer. Some other studies have excluded it arguing that only those taxes which have a direct bearing on the vehicle operators, and are thus likely to influence their behaviour, should be included.[17]

21. Andrew Leicester of the Institute for Fiscal Studies, on the other hand, argued that VAT on car purchases, servicing etc. should be seen as a general consumption tax rather than a specific tax on road users.[18] Professor Glaister, Director of the RAC Foundation, summed it up:

If you are trying to find a more efficient and fair way of charging for a road network and for its expansion and maintenance then you will of course look at the charges that people pay for the use of the network—things like fuel duty and vehicle excise duty. If you are asking whether in some sense the total tax take balances the total expenditure on roads and the associated facilities then you may want to include other things like parking charges, taxes on vehicle insurance—a long list of other items—and perhaps VAT is another item that you would include in there, but that is for debate.[19]

22. Having considered the various perspectives, we think it is important to draw a distinction between two groups of taxes, which we show in Table 1 above:

General taxes which anyone might pay on a wide range of income and expenditure, such as VAT, income tax and insurance premium tax. Some of these happen to fall on road users but they are not specific to road users. These taxes raise revenue to fund general Government expenditure.
Taxes that are levied only on road users, notably fuel duty and VED. These can be said to be motoring taxes and, as discussed in Chapter 1, they may have specific purposes, such as reducing carbon emissions.

Company car tax and fuel benefit charge are part of general taxes as they are income tax on benefits in kind and are not taxes specific to road users.

23. To the ordinary motorist, the difference between a tax and a charge may not be apparent or seem important. There are, however, some important differences between them regarding public policy. Taxes are compulsory, unrequited payments, whereas charges are paid in return for a service. The National Statistician, Karen Dunnell, explains the international definitions and how the Office of National Statistics classifies some existing "charges" (see Box 1).

Box 1

Difference between taxes and charges
Government revenue is mainly divided into taxes or service charges. Taxes are compulsory unrequited payments, where unrequited means that the payer does not receive anything directly in return. Service payments are requited in that they include the delivery of a service in exchange for a payment. In some instances the classification of these receipts can be difficult to interpret and the international statistical manuals recognise that "the borderline between taxes and payments for services rendered is not always clear cut in practice". As a result ONS consider the nature of the receipts carefully before reaching a decision.
The London congestion charge and road/bridge toll charges are payments made for vehicles to use the roads within a defined zone. The charges are judged to be requited payments in line with international guidance and are therefore classified as payments for a service.
The LEZ [London Low Emissions Zone—see Section 4] and the London Borough of Richmond Upon Thames emissions based parking charge are classified as taxes. The LEZ charge is a compulsory payment for specific vehicles to drive within the LEZ. Although the vehicles gain access to roads within the LEZ, the charging policy relates to vehicles polluting the air within the zone rather than the use of the roads. The LEZ charge on the use of the non-compliant vehicle is judged to be unrequited and classified as a tax on pollution.
Similarly, the London Borough of Richmond upon Thames's charge for a permit to park in a Controlled Parking Zone, which was implemented on 2 April 2007, is based on the emissions of the vehicle concerned. The decision to classify the charge as a tax on pollution is similar to the LEZ: the charge relates to the vehicle emissions rather than the direct consumption of a service.
Letter from Karen Dunnell, National Statistician, Office of National Statistics, in response to a Written Question from Eric Pickles MP. Parliamentary Written Answers, 9 February 2009

24. The principal taxes and charges on road users are therefore:

Fuel duty;
Vehicle Excise Duty;
Tolls for bridges, tunnels and the M6 Toll, and
London congestion charge.

25. In addition, there are parking charges paid to local authorities. These fund parking services and manage demand. The AA estimates that parking income from UK motorists totals around £1 billion, half of which is from penalties for contraventions.[20] These were considered in our 2006 report Parking policy and enforcement.[21] A recent study suggests that only a minority of local authorities make any significant surplus on car parking.[22]

26. In round terms, Table 1 shows that the Government raises close to £50 billion from road users. About one third of this is general taxation on consumption and income—VAT, Insurance Premium Tax, and Company Car Tax which are not specific to road users. About £30 billion is raised through taxes and charges specific to road users—£25 billion fuel duty, £5 billion VED and £0.5 billion (gross) from tolls on certain bridges and tunnels, and the London congestion charge. This is a large amount, both for the road users who pay it and the Government which relies upon it. Yet the Government does not present the figures in a comprehensive or accessible form. We have had to compile them from a variety of the sources and witness evidence. The information provided by the Government on this issue was much more limited than that provided by other witnesses.[23]

27. A sensible debate on the taxation of road users requires that the public has easy access to sound and well-presented data. The Government needs to publish explicit and comprehensive information on the amounts of money it raises through taxes and charges on road users.

European comparisons

28. A study by the Commission for Integrated Transport found that, unlike some EU countries, the UK tax system focuses on car use rather than car ownership, with British drivers paying significantly more to use their cars rather than simply paying to own them.[24]

29. In terms of total taxation on both ownership and use, British drivers are taxed at the European average and pay, in relative terms, similar amounts to drivers in Finland, Denmark, Ireland, Italy and France. However, in respect of car ownership, British drivers pay average or below average amounts of tax, depending on engine size; and in respect of car use, British drivers are amongst the most highly taxed in Europe.

30. Through our visit to the Netherlands and Germany, we learned of the taxes and charges paid by drivers in those countries. We compare them with UK tax rates in Table 2 below. below.

Table 2: Motoring taxes and charges in the UK, the Netherlands and Germany in 2009¹

UK² Netherlands³ Germany⁴

Fuel tax (petrol) per litre £0.52⁵ £0.62 £0.59

€0.59 €0.70 €0.67

Fuel tax (diesel) per litre £0.52⁵ £0.36 £0.43

€0.59 €0.41 €0.49

Vehicle tax per annum £0-£400.00⁶ £340.73-£1093.17 £5.99-£24.27 per 100cc

€0-€510.00 €384.00-€1,232.00 €6.75-€27.35 per 100cc

Car sales tax Nil 45.2% Nil

Bridge/tunnel tolls Few Few Few

Motorway tolls M6 Toll only No Lorries only

VAT 15% 19% 19%

Insurance tax 5% 8.5% 19%

Notes and sources:

1. Rates at February 2009 and rounded to the nearest penny/cent. Converted at £1.00 to €1.127 - average interbank exchange rate for February 2009.

2. HM Revenue & Customs.

3. ANWB Ev 224

4. BDI Ev 47

5. UK fuel duty increased to 54.19p per litre on 1 April 2009

6. The UK top band for standard rate VED increased to £405 for 2009-10

31. The UK has the highest rate of duty on diesel in Europe but it has now dropped to ninth highest position for duty on petrol.[25] Some other European countries, such as the Netherlands and Germany, have increased their fuel duty rates; and the fall in the value of Sterling against the Euro has narrowed the difference.[26] To some extent, the UK's high fuel duty is offset by lower taxes and charges elsewhere. There are no motorway tolls in the UK (other than the M6 Toll), unlike in France, Italy and some other European countries; the 15% VAT rate is relatively low by EU standards; and purchase taxes on new cars are high in some countries, such as the Netherlands.

32. In the UK, the rate of duty for diesel and petrol is the same. Diesel is more expensive than petrol due to technical reasons and market forces.[27] The price differential does not arise from a tax differential. Despite the higher price of diesel, there has been a significant switch by purchasers in recent years to diesel engine cars, due to their greater fuel efficiency and economy.

Declining cost of motoring

33. Taxes and charges are only part of the overall cost of motoring. Although some motoring taxes have risen, the overall cost of motoring has declined substantially over the past 20 years. RAC research has shown that:

[…] despite the perception, the cost of motoring in real terms has fallen, even when rising fuel prices were taken into account. In real terms, we found it is 18% cheaper to buy and run a car (comprising service and repair costs, insurance, road tax and breakdown cover), including fuel costs, in 2008 than it was in 1988.[28]

34. The implications of the Government's climate change policies also need to be considered. The Government has made clear its commitment to promoting vehicles with low or zero CO₂emissions, including electric cars, which consume less road fuel and are charged at lower rates of VED. These vehicles will yield considerably less fuel duty, VAT and VED revenue than the existing vehicle fleet. If levels of revenue are to be maintained, alternative taxation and charging arrangements are likely to be required.

35. The British driver is sometimes portrayed as uniquely highly-taxed. Yet, taken overall, the taxes and charges paid by drivers in comparable European countries, such as the Netherlands and Germany, are not so different to those in the UK. We support the UK emphasis on car-use taxes, as opposed to car-ownership taxes. It is more equitable that those who consume more should pay more. Such taxes are more likely to incentivise less fossil fuel consumption and therefore lower CO₂ emissions. The fact that it is 18% cheaper to run a car now than twenty years ago combined with increases in the real level of bus and rail fares over the same period, makes it more difficult to encourage modal shifts from cars to public transport. The basis of Government policy should be to reverse these trends.

14 Ev 136 Back

15 Ev 219 Back

16 Ev 161 Back

17 Ev 210 Back

18 Q 3 Mr Leicester Back

19 Q 2 Professor Glaister Back

20 Ev 161 Back

21 Transport Committee, Seventh Report of Session 2005-06 Parking Policy and Enforcement, HC 748, 22 June 2006 Back

22 Local Transport Today 514, "Parking not always a cash cow", 27 February 2009, p 5 Back

23 Ev 219 Back

24 Commission for Integrated Transport, Factsheet No.2: European Motoring Taxes Comparison, 2001 Back

25 EU Oil Bulletin in Petrol and Diesel Prices, Standard Note SN/SG/4712, House of Commons Library, 12 March 2009. Back