Expert Blog

Hitachi Capital Vehicle Solutions’ Full Response

TO THE 2015 SUMMER BUDGET STATEMENT

Last week, the Chancellor of the Exchequer, George Osborne, delivered his Summer Budget statement which included changes to Vehicle Excise Duty (VED) taxation, MOT periods, increases to the Insurance Premium Tax and the announcement of a new Road Fund. Today, Jon Lawes, Managing Director of Hitachi Capital Vehicle Solutions, made his full statement on the second Budget Statement for 2015.

“Last week’s announcement certainly made the country sit up and pay attention; unexpected reforms around vehicle taxation, increases to Insurance Premium Tax and the extension of first-year MOTs caught many of us off-guard. Even today, the industry is asking questions around the changes and, more pressingly, the implications that last week’s announcement will have.

VEHICLE EXCISE DUTY

“Changes to the VED system seem to have posed more questions than the Chancellor had hoped to answer with his new simple, ‘flat fee’ taxation system. The Chancellor claimed ‘no-one would pay more tax than they are now’ however closer examination doesn’t support this. Under the new rules, the vast majority of new cars will qualify for the £140/year rate from 2017 onwards. However, average new car emissions in 2014 were just 124.6g/km*, which attract a 12 month VED rate of £110/year under the current system.

“Emissions of new vehicles are constantly falling and with sub-121g/km cars attracting a maximum of just £30/year in VED taxation, this can be considered a significant increase for the average member of the public. Under the current system, a vehicle would need to produce more than 140g/km to qualify for a comparable VED rate. Any vehicle with sub-121g/km emissions – a significant percentage – will pay more than £100 extra every year in VED.

“Excluding the first year tax rate – which will continue and has increased considerably across the board – the new flat fee system will in effect penalise the cleanest of vehicles, while offering incentives for the worst polluting vehicles. Any vehicle producing more than 186g/km will, at the very minimum, see annual VED halved under the flat fee system.

“The Chancellor failed to mention the continuation of first year tax rates, based on emissions. Again, we have seen an increase across the board for these and, where a new car with average emissions would currently qualify for free road tax (up to 130g/km), new owners are facing bills of £160 for the first year in this instance, or up to £2,000 for the worst performers (plus 255g/km). In some instances, first year tax rates have more than doubled.

“But these penalties only apply to the first year, to the first owner; a flat rate system thereafter removes any incentive to purchase a lower emission car as a second hand buyer. The market may also be reluctant to change their current vehicle, especially if the average buyer then has to take into account a (higher) first-year tax rate and depreciation.

“If the mix of an emission-based system for the first 12-months with a ‘flat fee’ system thereafter wasn’t complex enough – as current VED systems will remain – the Chancellor then introduced a premium rate tax for cars costing more than £40,000. For the first five years, owners of these vehicles will have to pay an additional £310, meaning annual VED of £450.

“This could quickly become an administrative nightmare for all involved. Buyers and owners could face the real possibility of not knowing tax costs until they more or less take delivery of the vehicle. For leasing companies, they will need to consider this additional tax when pricing vehicles and for the remarketing industry, they will face real challenges as the market diversifies further.

“It wasn’t clear if this additional tax will apply to just the vehicle’s base price or price as specified, with options included, with the latter leading to even more potential red tape.

INSURANCE PREMIUM TAX

“With increases to Insurance Premium Tax further pushing motoring costs skywards, the next generation of drivers are given even less incentive to get behind the wheel. And with a flat rate of tax, there is little or no incentive for the used market to go for a cleaner vehicle. Indeed, we could face a time where we are more focused on a car’s original price than its current emissions, a stark contrast to the Government’s drive to lower emissions.

ROAD FUND

“One item praised by many was the introduction of the new Road Fund, which will see the money raised from the VED system go back into repairing, maintaining and developing Britain’s aging road network. However, the new Road Fund won’t come into place until 2020, some five years after its announcement (but in time for the next general election) and three years after the new VED system comes into force.

“The last three announcements made by Mr. Osborne have all stated investment of some £15bn in Britain’s road network and many have questioned where this funding will come from. The new VED system will certainly go some way to supporting this but delaying the fund to 2020 is as questionable a decision as extending first time MOTs from three to four years.

MOT EXTENSION

“Proposals to extend the first time MOT from three to four years are a real area for concern. Currently, only around 60% of all vehicles pass the MOT examination first time with brakes, suspension and tyres some of the main reasons for failures. Extending first time MOTs from three to four years sends a very mixed message to the market, especially around safety. Considering there are a significant proportion of drivers who fail to maintain their vehicles, the thought of extending the first mandatory check of a vehicle by a full year sends a shiver down the spine, especially as our degrading roads may have to wait even longer for investment from the new Road Fund.

“Ultimately, we have to ask if the Government is looking to incentivise the areas we need to focus on. A new, more expensive VED system which doesn’t support low emission vehicles, increases to Insurance Premium Tax which will only make motoring more unaffordable, a Road Fund which won’t invest in our crumbling road network for potentially five years and MOTs which could leave our cars untested for four years. For me, these are the questions we need to answer and focus on before trying to simplify existing systems further.”

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