Understanding Pay Per Mile EV Tax in the UK

Some thoughts on the budget…

For the automotive industry in the UK, there were two major changes in the 26^th November UK budget.

The first has not really been shouted about in the news, but will have a material impact on EV ownership; the increase of the “Expensive Car Supplement” threshold from £40k to £50k. What this means is that run-of-the-mill family EVs that currently fall into the tax bracket will be free of the £440 annual tax. Good news in general, however there will now be a couple of implications of this change:

1. Manufacturers are less incentivised to sell their EVs at less than £50k, generating upwards pressure on overall new EV prices
2. There will be a lull in EV sales of any cars falling between £40k and £50k between now and April 2026 when this comes into effect.

I don’t think either of these outcomes are a disaster in the grand scheme of things, and in general EV prices are coming down (Renault 5 anyone?), but there will be some unintended consequences of the change.

The second, and more significant change to EV ownership is the “Pay Per Mile” road duty coming into force in 2028. This concept was leaked a few weeks ago, and many rumours have circulated about how it would work in practice. Fear not though! The government have released a consultation paper on this new policy, and I encourage anyone with an interested (vested or otherwise!) to respond.

My first thoughts with this new policy were around the hybrid vs. EV tax rates; £0.03/3p per mile for EVs and half that (£0.015/1.5p) per mile for Hybrid vehicles. On the surface, perfectly sensible. EVs do all their miles without fuel so need to pay more. Hybrids are in principle doing a proportion of miles on fuel and so pay fuel duty, offsetting the requirement for the pay-per-mile levy.

However…

Does this policy not encourage the sale of PHEVs with large batteries and tiny range engines, thus meeting the definition of a hybrid, but in principle only ever running on electricity? This way the owner would get the lower 1.5p/mile rate and not be paying fuel duty either. I’d be looking for a BMW i3 REx fairly sharpish if the EV only range suits your needs!

Pay-Per-Mile EV taxation is not a new concept, with Iceland and New Zealand having implemented such a scheme last year. But it stands to reason that there will be pitfalls and edge cases for the application of such a tariff that need due consideration.

The consultation paper stipulates categorically and repeatedly that the scheme will NOT utilise any form of active tracking for mileage counting, citing citizen privacy as a concern. So that is good news.

Instead, the system will work on annual reporting by the vehicle owner of an estimated mileage for the year ahead, coupled with formal reporting of odometer readings at each annual MOT. These two numbers will of course never tally in practice, and how intentional misreporting of mileages is managed is one of the primary challenges the consultation highlights and welcomes feedback on. The MOT reporting step is intended to help in detecting fraud, but in reality it might just highlight individual seasonal usage fluctuations.

In essence, when your Vehicle Exercise Duty (VED) is due, you will report two numbers; the current odometer reading and your estimated mileage for the 12 months ahead. 12 months later you will report your odometer reading again, with any credit due to over-estimating carried forward, or debit from under-reporting charged at that point. And no, there is no allowance for mileage done outside of the UK or done off-highway. You pay for the delta. End of.

New cars currently do not have an MOT at the end of the first or second years. The suggestion is a free (to the owner) mandatory annual mileage confirmation, perhaps tied in with servicing if applicable.

What then about second-hand cars?

The consultation states that “The government expects the eVED status of the vehicle (whether it is sold with pre-paid mileage or a mileage deficit) to be reflected in the sale price of the vehicle.” I guess this is similar to selling a car with a full tank of petrol and asking for an extra £50 to cover it, but you can see how this might create friction in the selling process. There will need to be a way for anyone to verify the credited mileage on vehicle prior to sale, perhaps in the same vain as checking the MOT history online.

It does also open the door for dealers to offer “pre-paid” miles as an incentive for cars, part of a package as they currently do with free insurance or servicing. A cost offset for the owner that is reflected in sale price.

Ignoring that 1 in 40 cars on UK roads are suspected of having been clocked and that this new incentive only encourages that to get worse, I can see that at least some thought has been given to the implementation. It does little to encourage EV adoption, instead seemingly it promotes hybrids just a couple of years before they are mandated. The Tax, Motoring and Environmental policies are not aligning here, but the 2028 implementation is 2 and a half years away; a lot can change before then.

I encourage anyone with an interest to respond the consultation here.