UK’s Tax System Risks Fostering a “Tax Haven” for High-Polluting Luxury Cars

Recent analysis by the green transport advocacy group Transport & Environment (T&E) has identified a potential regulatory oversight in the United Kingdom’s tax architecture that may inadvertently position the nation as a “tax haven” for large, luxury, and high-polluting vehicles. The UK’s relatively lenient tax scheme, especially in the acquisition tax domain, starkly contrasts with the more stringent measures adopted by other European nations to mitigate vehicular emissions, air quality degradation, and associated safety implications.

The scrutiny, derived from T&E’s Good Tax Guide, reveals a disquieting disparity in tax levied on battery electric SUVs (BEVs) versus their petrol counterparts within the UK, positioning the country 24th out of 31 assessed European nations. The UK’s first-year Vehicle Excise Duty (VED) is significantly lower than its continental peers, culminating in a reduced financial disincentive for purchasers of high-emission vehicles. For example, the acquisition tax for a medium-large SUV such as the BMW X5 is markedly lower in the UK (£1,565) compared to France (€60,000 or £51,415), highlighting the stark disparity.

The 2023 registration data corroborates this tax policy’s repercussions, with UK registrations of vehicles emitting between 160gCO2/km and 199gCO2/km, and over 200gCO2/km accounting for 9.3% and 6.1% of new registrations, respectively. This is in stark contrast to France, where such vehicles constitute a mere 0.7% of new car registrations.

Despite the UK’s commendable strides in fostering a progressive benefit-in-kind (BiK) tax system for company car drivers, which has catalysed a surge in corporate BEV registrations, the private car tax system remains a point of contention. T&E’s findings suggest that the UK government’s proposed measures, such as the introduction of an ownership tax for BEVs starting in 2025, may further diminish the fiscal distinction between BEVs and petrol vehicles, potentially undermining the shift towards environmentally friendly transport options.

T&E has articulated a set of recommendations for the UK government, including augmenting first-year VED on the most polluting vehicles, instituting a weight-based surcharge for the heaviest new cars, and providing a clear roadmap for the BiK system’s future beyond the 2027/28 fiscal year.

Ralph Palmer, UK Electric Vehicle and Fleets Officer at T&E, has emphasised the need for tax reforms targeting affluent consumers of oversized and pollutant-intensive SUVs. Such measures would foster environmental sustainability and present an equitable revenue stream for the government, aiding in the transition to electric vehicles for all income groups.

In conclusion, it is imperative for the UK government to recalibrate its vehicular tax system in alignment with broader European efforts if it wishes to promote green mobility and more environmentally sound consumer choices.