Major shifts in consumer and business behaviour often shape new tax policies. This was the case with two tax reforms announced in the latest Budget affecting the country’s decarbonisation programme and the UK motoring sector.
On the one hand, the government tweaked the implementation of an upcoming tax on imports of high carbon-emission goods to reduce the burden on affected importers that could have depressed their activities. On the other, it introduced a brand-new tax that will hit electric vehicle (EV) drivers as EVs’ share of the motoring market – including fleet – continues to grow.
Indirect carbon tax
With regards to carbon emissions, the indirect tax that will be imposed from 1 January 2027 is called the carbon border adjustment mechanism (CBAM). It is a new form of taxation on imports, although as a concept it has been floated in the UK since 2023, when it was introduced in the EU (see AB article ‘Many not ready for CBAM’).
The inclusion of indirect emissions will only be brought within scope from 2029
The UK version will initially apply only to the carbon-intensive goods and sectors of aluminium, cement, fertilisers, hydrogen, iron and steel.
The tax aims to create a level playing field with domestic producers of those carbon-intensive goods so that imported products will suffer a comparable carbon price to that paid by UK manufacturers, which are subject to carbon pricing under the UK Emissions Trading Scheme (ETS).
This is ultimately meant to discourage the movement of production and associated emissions to countries with low or no levels of decarbonisation effort, just to avoid carbon pricing costs.
‘If you are buying steel from abroad, the CBAM may make the cost advantage disappear’
With the Budget, however, the UK government has decided that the inclusion of indirect emissions, which are those linked to the generation of electricity associated with the production of CBAM goods, will only be brought within the scope of the tax from 2029 at the earliest.
Reduced burden
The government explained that this is meant to provide continued support for the Energy Intensive Industries Compensation Scheme, which relieves certain sectors that rely on high electricity usage from extra environmental charges.
An additional advantage for importers of CBAM goods will be a reduced administrative burden, as the cost of indirect emissions generated abroad can be disregarded, for now.
‘Businesses that have started to try to understand what CBAM will mean for them are probably grateful that the indirect emissions are not in scope from day one,’ says Hakan Henningsson, national customs and excise lead at S&W.
Nonetheless, the introduction of this new tax may force British businesses and importers to rethink where they can source the products in scope.
‘If you are a business buying steel from abroad, the CBAM may make the cost advantage disappear,’ says Henningsson. ‘Figuring out what the CBAM cost will be for the business is the first step that will then drive other considerations such as: are there domestic suppliers that provide better service and better-quality products now for the same price?’
Fleet managers beware
The new UK tax on drivers of EV vehicles, to be charged to current and future EV drivers from April 2028 on the use of their own and fleet cars, is called Electric Vehicle Excise Duty (eVED) – not to be confused with the Vehicle Excise Duty, an existing duty levied on car ownership also known as road tax.
The eVED will be a form of mileage tax whose introduction should not come as a surprise to readers of this magazine (see ‘Mileage taxation on horizon’) as we transition towards driving less polluting cars, which will no longer use diesel or petrol and as a result no fuel duties will be payable.
The rationale is to strike a balance between fairness and incentivisation
Fleet managers should note that the rate of this new tax will be 3p per mile for fully electric cars, which is approximately half of the 6p per mile the average driver of an internal combustion engine car pays in fuel duties at present. The registered keepers of any EV (for fleet vehicles, typically the car users, or for leased vehicles, the finance company leasing the vehicle) will be expected to be responsible for providing an accurate or estimated mileage reading and making eVED payments.
Plug-in hybrid vehicles – which can be driven in either electric or petrol mode – will be subject to a reduced eVED rate of 1.5p per mile, as drivers of hybrid cars will continue to pay fuel duty at the pump as well.
The rationale here is to strike a balance between fairness (EV drivers must contribute to road repairs in the same way as those driving any other cars) and incentivisation, as the government wants EVs to continue to be an attractive choice for consumers and businesses.
More to come?
This is unlikely to be the end of this tax increase story, though. When the ban on sale of new petrol and diesel cars comes into effect in 2030 and the fuel duty revenues will likely drop from the current £25bn a year to around £12bn, the case to raise further taxes on EV vehicles will be strong.
After 2030 it seems plausible that at least one of these additional measures could be introduced: a much higher eVED rate, a tax on electricity used to charge cars or a road-tax surcharge for EV registered keepers.
Perhaps unsurprisingly, it appears that some of these measures have already been considered by the government as an alternative to the eVED. However, they have been ruled out for now, as suggested in the document published by the Treasury on the ongoing consultation on the new tax.
More information
See ACCA’s guidance from the autumn Budget
