Currently reading: Subs exclusive: Ticking tax bomb threatens EV popularity

With EV subsidies being removed across the UK and EU, buyers and manufacturers are faced with rising costs

Electric sales are ever increasing, not just in the UK but across mainland Europe, too. The switch is being facilitated by a patchwork of incentives offered by countries to minimise the price hike compared with combustion-engined cars.

However, we’re now at the point where countries including the UK are thinking the market has become self-supporting, allowing them to slow or stop the financial help.

The process is likened by Matthias Schmidt, analyst and author of the European Electric Car Study, to parents working out exactly when to take the stabilisers off the bike. “That moment appears to be arriving in some northern European markets,” he wrote in his latest report. The question is: are we going to see a wobble in EV uptake?

The UK government noted the EV market’s health when it removed the final remaining EV purchase incentive, worth £1500 in its death throes, last month. EV sales reached a 16% share of the new car total in June, outpacing that of diesel, according to figures from the SMMT. Meanwhile, across Europe, electric sales reached 10% of passenger cars in the first quarter of the year, according to European automotive lobby group ACEA.

In the UK, the loss of the purchase incentive is unlikely to make a big dent. The bigger motivator for sales is still the low company car tax, which is currently just 2% of purchase price and stays that way until March 2025. Expect a change of heart from that point on.

The problem for private and business EV buyers alike is working out when they’re going to pay the equivalent of fuel duty. In June, the government-funded Climate Change Committee published a report calling for the government to apply an electric inclusive replacement for fuel duty by as early as the first quarter of 2023. Fuel duty netted the government £21 billion in 2021, with over half coming from petrol and diesel sales. In 2019, it was £28 billion.

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The introduction of “some form of road pricing” should be done sooner rather than later, the CCC urged. “Drivers could begin to assume that EV driving will always be tax-free,” the committee warned in its report.

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As ever, the danger is unpopularity, something that the current government won’t want to add to. “Given the current cost-of-living crisis, a wider public discussion of a review of road pricing may be seen as politically unpalatable owing to the risk of a public backlash,” Penny Simmons, tax director at legal firm Pinsents Masons, said.

However, that doesn’t change its inevitability, which might worry those about to take the plunge into EV ownership.

Elsewhere in Europe, Norway is swiftly rolling back some of the extremely generous incentives that have led electric cars to dominate the market. In June, for example, 79% of cars sold were electric, according to OFV figures, topped by the Tesla Model Y. However, Norway now plans to reintroduce the 25% rate of VAT for new electric cars costing over 500,000 NOK (£41,300), which in this wealthy market is most of them.

All eyes, meanwhile, are on Germany, which accounts for one in four electric models sold in western Europe, according to Schmidt’s figures. Germany has been far more generous than the UK, at least as far as purchase incentives go, but it is proposing to cut the €6000 (£5070) incentive to €4000 next year and to €3000 in 2024 and 2025, Bloomberg reported in April.

Elsewhere, France has decided that supporting EVs is still worthwhile and recently decided to extend a €6000 subsidy into 2023. Of course, the pressure is being applied to the manufacturers’ side, too, and that’s not going away. For example, the UK is planning a California-style 'ZEV mandate' that forces car makers to sell a certain proportion of EVs by 2024 onwards, up to the point when internal combustion engines are banned outright by 2035.

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In the European Union, the progressively tougher CO2 emissions regulations also have the same effect of forcing car makers to sell more electric vehicles to bring down average tailpipe emissions, up to the point when they’ll all have to be zero-emission by 2035.

That concentrates car makers’ minds to make electric vehicles cheap enough and practical enough for consumers to choose them over internal-combustion-engined alternatives. That’s a tall order, given the currently inflated raw material prices, especially for batteries, which Ford said recently had wiped out any profit it was making on the Ford Mustang Mach E.

That means car makers will be lobbying hard for incentives to stay in place, at least until the supply chain situation sorts itself out. But the clock is ticking for cash-strapped countries to plug electric vehicles into the same tax-generating matrix as internal combustion engines. Prepare for a bumpy ride.

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