Three new VED bands should be introduced to reflect the most efficient cars, while a new emissions tax should be introduced for vans, a report suggests.

Band A, for cars up to 100g/km, would be replaced with three new groupings – 0-50g/km, 51-75g/km and 76-100g/km – and a graduated VED system for LCVs would be based upon CO2 emissions per tonne of loading capacity in order to control for the impact of vehicle size on emissions.

The Society of Motor Manufacturers (SMMT) commissioned the Centre for Economics and Business Research (CEBR) to consider the future of motoring taxation, focussing primarily on the role of vehicle excise duty (VED) as part of future UK fiscal policies on motoring.

It says the combined revenue from the two major motoring taxes, VED and fuel duty, has stood at over £30bn since 2007.

In 2013/14, of the total tax take of around £33 billion, VED from all vehicles contributed almost £6bn of revenue compared with £27bn from fuel duty (excluding VAT charged on top of fuel duty). As a result, revenues from VED were equivalent to 1.2% of all tax receipts in 2013/14.

The report suggests VED receipts from cars will begin to fall in both nominal terms and as a percentage of GDP from 2015/16 onwards.

The CEBR forecasts, based on recent rates of reduction in average CO2 emissions and the UK marginally meeting the 2020 EU target of 95 g/km, would see revenue fall from over £5.7bn in 2013 to around £4.4bn in 2025, even with VED rates revalorised by RPI inflation each year. This implies that receipts would fall from their 2013 level of 0.33% of GDP to just 0.16% of GDP in 2025.

Based on the current system, central forecasts suggest that by 2025, nearly three quarters of all new cars would be exempt from VED payments altogether, placing continued pressure on VED revenues in the years beyond our forecast horizon.

At present, around two-thirds of new vehicles registered are not liable for VED in the first year.

VED has played and will continue to play a prominent role in the overall motoring taxation model in the UK, the report says.

However, while lower CO2 emissions and increased vehicle efficiency are undoubtedly a positive result, over the longer term, it presents a challenge for the Government in the form of an unsustainable revenue base.

With the advent and uptake of new technologies, consumers are expected to shift away from conventional petrol and diesel fuelled vehicles, also impacting upon future fuel duty revenues.

The gradual evolution of VED bandings for cars, particularly segmentation of the current top band A - as seen in the company car tax regime - would, it says, enable the Government to maintain the proportionate size of the tax base and the effective average tax rate per vehicle while still allowing for incentives for consumers such as zero VED rates on most efficient cars.

However, a graduated VED system for vans which is structured in the same way as the current system for cars in the UK would lead to those vans with low load capacities attracting the lowest rates and the largest vans attracting the highest rates.

The report says that the VED system should not act to discourage particular segments of the van market in this way.

It continues: “Many van users may require the full capacity offered by the largest vans in order to sustain business needs.

“From an environmental perspective, it is optimal for users to make single trips in the correctly sized (albeit larger, more CO2 emitting vans) than having to make multiple trips in smaller vans.

“As a result, a graduated VED system for LCVs should be based upon CO2 emissions per tonne of loading capacity in order to control for the impact of vehicle size on emissions.”

The report suggests that particulate matters and nitrous oxides, which are impacting air quality particularly in urban areas, should be dealt with at a local level.

The report says: “Road user charging has proven to be successful and accepted across many cities, despite initial dissent.

“Working in conjunction with VED, it provides an alternative option which can be more easily adjusted to allow for charging during different times of the day (London congestion charging zone), according to differing vehicle emissions (ultra-low emissions zone charges) and also accounting for usage within differing zones/local roads.

“Post-election, if greater powers are devolved to local authorities, regionalised or localised road charging may become an option for those local authorities that wish to adopt ultra-low emission zones.”

> Read the full report.