A shift from internal combustion engine cars to electric vehicles (EVs) could trigger huge tax shortfalls for the UK if policymakers fail to keep up with the shift, a report has warned.
Annual tax receipts could fall by £10bn a year, from £32bn currently, come the early 2030s due to EV drivers being exempt from fuel and vehicle exercise duty, think tank the Resolution Foundation forecast.
“Should the taxation of motoring fail to keep pace with the transition to EVs, these revenues will dwindle,” the report warned.
“A failure to replace them would bring unwelcome trade-offs, such as whether to stymie public investment or to increase other taxes considerably.”
Combined, fuel and vehicle exercise duty account for around 3% of the UK’s tax receipts, raising around £25bn and £8bn each year respectively.
However, since EVs do not burn petrol or diesel, drivers do not pay fuel duty, while the introduction of an annual exercise duty in 2025 could still prompt losses, the foundation said, given tax will no longer have to be paid at the point of purchase.
EVs already accounted for one in seven new UK car sales in 2022, ahead of a 2030 ban on the sale of petrol and diesel cars.
This boosted the number of EVs on UK roads to over one million for the first time, the report explained, meaning a “fair reform of vehicle taxes […] is essential and urgent”.
The group urged the government to introduce a new road duty for EV drivers, which it pointed out tended to be richer people who disproportionately benefit from the lower taxes.