(Except clauses 4, 7, 10, 19, 35 and 72) - Clause 21

Finance (No. 3) Bill – in a Public Bill Committee on 19th May 2011.

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Question proposed, That the clause stand part of the Bill.

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury) 9:00 am, 19th May 2011

It is a pleasure to see you in the Chair, Mr Gale. I have a few brief questions on clause 21. I would appreciate clarification of the Government’s thinking on using vehicle excise duty as an environmental tax rather than as a revenue-raising measure. What consideration has been given to using VED as a way of changing behaviour, perhaps encouraging people to use cars that are more environmentally friendly? Will the Minister explain why more was not done in the Budget to favour fuel-efficient family cars? Does she hope that more work will be done on that front in future?

In November 2010, the Institute for Fiscal Studies published the long-running Mirrlees review of tax reform. As part of its work on motoring taxes, the review questioned whether a tax on vehicle purchase might be more targeted than the annual vehicle excise duty payment. Have the Government given any consideration to that suggestion, and does the Minister agree that it might better achieve the aim of encouraging people to buy cars that are more environmentally friendly?

I turn to the question of evasion. In its 2009 report on VED evasion, the Department for Transport estimated that it cost about £34 million in 2009-10. The overall rate of unlicensed vehicles in stock in Great Britain was estimated at 0.7% in 2009, which is equivalent to about 244,000 vehicles; that was down from 1% in 2008. The evasion rate for motorcycles was estimated to be 3.2%, which was up on the previous year but down on the year before that. Has the Treasury assessed the impact of those rises in evasion, and what steps are the Government taking to prevent it?

The freeze on VED for heavy goods vehicles will be a welcome boost for many hauliers. However, some will not benefit; I shall deal with that when we come to clause 22. If the measure was intended to help industry by reducing distribution costs, is there not a case for freezing VED for light goods vehicles or vehicles used by smaller businesses? Many small businesses increasingly suffer the same pressures as the haulage industry, particularly as a result of fuel costs, as we have heard in previous sittings. Has the Treasury explored the possibility  of freezing duty on light goods vehicles or other business vehicles, to help small businesses and traders not in the haulage industry whose vehicles are integral to their livelihoods?

Photo of Justine Greening Justine Greening The Economic Secretary to the Treasury

It is a pleasure to see you back in the Chair, Mr Gale. First, I shall explain what the clause does. I shall then respond to the questions posed by the shadow Minister. The clause makes changes to vehicle excise duty rates for cars, vans, and motorcycles, with effect from 1 April 2011. Motoring is an essential part of everyday life for families and businesses. The Government recognise the real difficulties being created by record pump prices. As part of a package to ease the burden on motorists, we announced in the Budget that vehicle excise duty rates for 2011-12 would increase only in line with inflation; and to support hauliers, duty rates for heavy goods vehicles will be frozen for the 10th successive year.

The clause changes standard rates for cars purchased after 2001 in line with inflation, and by up to £25 more for higher-carbon emitting cars. Rates remain unchanged for the cleanest cars that emit less than 120 grams of carbon dioxide per kilometre. More than 80% of cars purchased after 2001 will pay up to £10 more, and of these almost half will pay only up to £5 more.

The hon. Lady asked about vehicle excise duty being used as an environmental tax. The way in which it is structured can bring about positive behaviour change. She is right to point out that technology does change; the Government therefore need to keep a watching eye on VED to ensure that it can continue to be successful, in relation to its potential to have an environmental impact. However, we also need to learn the lessons of recent years. The previous Government attempted to environmentalise VED for pre-2001 cars in 2008. Of course, that was incredibly controversial because the change would have been retrospective, and the people who owned those vehicles could not go back and change their behaviour. We are clear that ensuring that a tax is structured to drive positive environmental behaviour is one thing; ensuring that that can happen on the ground, and that people can change their decisions of the future is another.

That brings me to another point that the hon. Lady made, about the Mirrlees review. This is an interesting issue. We have talked about switching taxation away from economic goods, such as people working, to economic bads. Clause 21 changes first-year rates, chargeable on the first vehicle licence taken out on a new car, in line with inflation. First-year rates are intended to influence up front the purchasing choices of drivers buying brand-new cars by acting as a signal at the point of purchase that people can save money by choosing lower-carbon cars. In line with the EU emissions target for new cars, the rates remain zero for cars emitting less than 130 grams of carbon dioxide per kilometre, and the highest-emitting new cars pay the top rate of £1,000.

The hon. Lady is right to point out that that could have a positive environmental effect, but there are two caveats to that. One relates to the level of the first-year rate in relation to the overall purchase price of a car. Although we can send some signals and encourage behaviour, there is also a need to understand that consumer choices about cars will be driven largely by the overall  price of a car. The second point is that it is important to consider other areas. For example, we have made changes to the company car tax regime to encourage a more environmentally minded decision by people who are getting a company car. That is important because many company cars feed into the second-hand car market. I can reassure the hon. Lady that we do see the potential in this area for driving positive environmental behaviour.

The higher rate of duty for cars and vans registered before 1 March 2001 increases by £10, and the lower rate by £5. Low-income households are less likely to own a car, and those that do are more likely to own cars registered before 2001. The owners of about 40% of those cars will pay only £5 more. Furthermore, clause 21 increases the standard rate of duty for vans first registered from 1 March 2001 onwards by £10. The reduced rate for vans achieving early compliance with European air quality emissions standards increases by £5. Rates for motorcycles will also increase in line with inflation. Those motorists will see an increase of no more than £4. The hon. Lady has asked what we are doing to support people with smaller vehicles that they may use for their business. I think that I am right in saying that we have frozen van fuel benefit charges, for example, so we are working to support people who need their vehicles for their business.

The Government are easing the burden on motorists at this time of record pump prices. We are providing support worth £1.9 billion, which includes a cut in fuel duty, the abolition of the fuel duty escalator, and its replacement with a fair fuel stabiliser. As part of that package, we are maintaining rates of VED in real terms to support motorists and the sustainability of the public finances, while incentivising and promoting the development and purchase of low-carbon vehicles. Hauliers have been benefiting from frozen duty rates since 2001. In 2011-12, heavy goods vehicle rates will be approximately 30% lower in real terms compared with 2001. We will continue to support hauliers in this climate.

Question put and agreed to.

Clause 21 accordingly ordered to stand part of the Bill.