The Treasury has underestimated the tax take from the new first year VED registration system introduced on April 1, prompting warnings it may seek to rapidly increase charges in coming years to make up for the shortfall.
Cars bought from this month will be subject to the new showroom tax, a charge the customer will pay in the first year of ownership, based on the new car’s CO2 emissions.
In the second year VED road tax rates will revert to the regular rate.
For 2010-2011, drivers of newly purchased cars emitting less than 131g/km will pay nothing, a saving of up to £90.
Based on the 2009 market, this will apply to approximately 7.2% of the new car market with the reduction encouraging sales of the lowest emitting models.
Drivers are cars emitting more than 166g/km will see their first-year rate increase by between £70 (Band H 166-175g/km) and £515 (Band M more than 255g/km).
Just 1.5% of cars registered in 2009 would fall into this band.
Based on the 2009 market, the most popular band, accounting for 19.7% of the market, will be for cars emitting 131-140g CO2/km where motorists will experience a £110 charge, as per the standard rate.
But the emission reduction work by manufacturers has moved on ahead of the Government’s projections on potential revenues, says the Society of Motor Manufacturers and Traders (SMMT).
Chief executive Paul Everitt said: “The Treasury is not going to raise the revenue it expects from this tax because the market has shifted faster and further than it expected.
“20% of the cars sold in 2009 emitted less than 120g/km which equates to zero revenue for the Treasury.”
Worryingly for the industry, the inaccurate revenue projections could force the Treasury to “arbitrarily” increase showroom tax rates in order to make up the shortfall, leading to an erosion in consumer confidence in Government taxation and environmental policies.
The SMMT believes dealers will highlight the positives of the tax, pushing sub-130g/km models where the VED rate has been reduced to zero.
A poll on am-online.com saw users vote 91% in favour of a delay until the UK’s economy had recovered.