Of vignettes and VAT

Yesterday, I followed a tweet from @citycyclists to thisannouncement, about a “vignette” system for foreign HGVs in the UK.  Henceforth, just as British HGVs generally have to pay to use roads on the continent, European HGVs will have to pay a charge for using British roads.

Apparently it would be discrimination forbidden by EU treaty for the same charge not to be applied to UK HGVs, so it will be, but they will get it rebated on their vehicle excise duty.

The announcement from the Cabinet Office opines that VED levels for HGVs are “intended to reflect the different levels of damage caused to the road by the vehicle”.

Well, not really.  As I commented here, damage to roads is proportional to the square of a vehicle’s axle weight.  So, a 44 tonne 5-axle artic will on average impose an axle weight 15 times that of a family car.  That produces about 200 times the damage effect.  The top rate of VED for such behemoths is perhaps 10 times that of a small family car, so proportionately the HGV is paying only 5% as much as that car – and that is before you consider the vastly higher mileages of the big rigs.

Now I am onto a subject which is close to my heart – or my paycheck at any rate – taxation.  Commercial haulage vehicles pay about 30% less road fuel tax, per litre, than private cars.  Why?  Because they don’t pay VAT.

“Of course they do”, you cry.  Actually, they don’t.  VAT is an end-user tax.  Businesses, of any type or size, merely act as tax collectors on behalf of the government.  When you or I fill our supermarket trolley, we pay 20% VAT on items like chocolate, cakes, alcoholic drinks.  That is charged by the retailer, who hands over to HMRC the excess between what he collects from the customer and what he has paid to suppliers, transport companies etc, in a long chain which goes right back to the original raw materials suppliers.  So, they collect the tax from you, they don’t pay it themselves.

If you also put items like fresh meat and vegetables, newspapers etc, into your trolley, you pay no VAT on those because they are “zero-rated” – which means that the supply chain has in effect over-collected VAT and so is entitled to claim it back as a cash refund.  (You might like to consider that injury is added to insult, that your frozen horsemeat lasagne carries 20% VAT as a prepared ready-meal, while fresh lamb or beef does not.)

Anyway, I digress.  What I wanted to say was that HM Treasury invited suggestions from any quarter, whether professional or personal, on ideas for improving the tax system, and – in my personal capacity – I responded.  (I tweeted the link, by the way, so I hope others picked it up but I’m afraid the consultation is now closed).

My suggestion was that the taxation of motor vehicles and their fuel could be rebalanced, so that less tax fell on ownership of the vehicle, and more fell on use.  Whether or not I believe that the level of taxation of motor vehicles is high enough is irrelevant here – I was making a technical submission so I proposed it on a zero-sum basis.  In  any case, if you are going to raise car taxes you need to address the issue of people who can’t really afford a car but nonetheless are compelled to have one in order to hold down a rural job or have mobility as a disabled person etc.

According to AA statistics, around 25-30% of the annual cost of owning a car and using it an average amount is spent on fuel, the rest of course being depreciation, finance charges, maintenance and insurance etc.  While this sounds a lot, it nevertheless remains true that once you have stiffed yourself for the cost of buying and insuring etc a car, the marginal cost of actually using it, per mile travelled, is ridiculously low, even now with fuel prices rising.  It makes the choice of car over bus or train, or indeed foot or bike, too easy to make. 

If static taxes – those which don’t relate to mileage – were significantly cut, for example by reducing VAT to the minimum level permitted by EU law for purchase, maintenance and safety related spares such as tyres etc, and cutting VED to an admin charge level, if it is actually needed at all, the loss could then be made up by significantly increasing the rates of duty and perhaps VAT on fuel and other use-related charges such as parking. Of course, a far more rational way of charging for road use would be road-pricing itself, as proposed in this study by the Institute of Fiscal Studies for the RAC Foundation (believe it nor not!) but I suspect that the political will for that is some way off yet.

You might need to provide for duty rebates for commercial vehicles – assuming of course that you think that they pay enough motoring tax already, or are making a purely technical submission – because, as I say, they don’t actually pay VAT so the duty increases would far outweigh the savings on static taxes.

Anyway, the thinking is that we should be doing everything we can to reduce car use.  As VoleOSpeed says in his latest post, we might as well accept that the private car is here to stay, and indeed I have to admit I find mine jolly useful at times, like for longer journeys or heavier loads, but we could use them less and use alternatives more.  We all know that around a half of all car journeys in cities are less than 5km – half less than 5 miles outside urban centres – and these are eminently feasible distances to cycle, if conditions permitted.

This, in effect, is what the Dutch, and the Danes, and the Germans, already do.  VoleOSpeed mentions the 20% modal share in the Netherlands compared to the paltry 2% (if that) here, but curiously this does not mean that the Dutch own fewer cars than we do – according to this table Brits, Dutch and Danes have similar ownership levels and Germans are way above us in the “league” table.

They just know when it is appropriate to leave them at home, and we don’t.