DEFINITION of 'Vehicle Excise Duty'

Vehicle excise duty (VED) refers to the tax which must be paid for most vehicles in the UK that are either driven or parked on public roads. VED is also commonly referred to as car tax, and does not fit the standard definition of a tax levied at the point of manufacture. VED is payable yearly and rates are based on various factors, including the date of manufacture, the engine size, and the theoretical carbon dioxide emission.

Origins of Vehicle Excise Duty

The first instance of vehicle tax in the UK came with the 1888 Customs and Inland Revenue Act, around the time motor cars were just about to make their first appearance on British roads. The intent of the tax at the time was to limit and control the use of cars. The numbering and registration of cars was introduced in 1904, and in 1906 focus shifted to the condition of the roads. It was decided in 1909 that a new tax based on the power of the car engine would be introduced, and that the proceeds of this tax would be used to improve road infrastructure.

The Road Board was created in 1910, and was then superseded by the Road Fund in 1920. The revenue collected in the road fund was so often appropriated for other uses that the chancellor of the exchequer, Winston Churchill, called it the “Raid Fund.” From 1937, vehicle excise duties (VED) were paid into a new fund called the Consolidated Fund, and the Road Fund served only as an administrator until it was closed down in 1956.

In the late 1970s, there were talks to abolish the VED, and to increase fuel tax instead to cover the shortfall. However in 1980, the decision was made to retain the vehicle tax.

The Changing Structure of Vehicle Excise Duty

From 1997, the government began discussing plans to estimate VED on a car’s level of carbon dioxide emission. The decision that followed the 1999 Budget was that new cars registered in the following years would be classified into one of four vehicle excise duty bands, based on their emissions. Some incentives were given within each band for cars using fuel considered to be cleaner. The tax on new cars was significantly lower than that on older cars, encouraging the motoring public to purchase newer cars.

In the years 2002, 2003, and 2006, fifth, sixth and seventh bands for vehicle excise duties were respectively introduced. In the 2009 UK Budget, an overhaul to the system was announced, introducing 13 VED bands in which all new cars will be categorized in.  

Most Recent Developments in VED

In 2014, the government abolished the previously used paper tax disc, which was required to be displayed on a vehicle’s windscreen. The government announced that there was no need for the discs, and that the electronic vehicle register and Automatic Number Plate Recognition could ensure that vehicles were correctly licensed and that VED had been paid.

2017 saw a major overhaul of the vehicle excise duty band and rate configuration, which has resulted in the car tax being substantially higher or lower for certain types of new cars.

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