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Pre-Budget report scraps retrospective road tax increases but increases fuel duty

The pre-Budget report has confirmed that fuel duty will increase by 2p per litre, VAT will be cut from 17.5% to 15%, and plans have been shelved for a retrospective increase in road tax for cars registered since March 2001.

Here’s all the news in more detail:

• From 1st December 2008 the headline rate of VAT will be cut from 17.5% to 15% until the end of 2009. Chancellor of the Exchequer Alistair Darling urged retailers to pass the savings on to consumers.

• To offset the reduction in VAT, fuel duty will increase by 2p per litre. Fuel duty rate changes will take effect from 1st December 2008. There will be a further rise in duty rates on April 1, 2009. However, the Chancellor said that the changes should result in no price increase at the pumps.

• The protests over Vehicle Excise Duty increases scheduled for 2009 has brought, as predicted, a Government U-turn. Now, for cars registered on or after March 1, 2001 those in Bands A-E (up to 140 g/km) will see no increase in 2009/10. Rates for cars in bands F-M will rise by £5. From April 2010 the ‘first year rate’ will be introduced as announced in the March 2008 Budget. However, rises on vehicles already on the road will be capped at £30 for the most polluting cars. The least polluting cars will benefit from a £30 cut in VED, while other cars will see no increase in the standard rate.

• The Chancellor announced £3 billion worth of capital investment will be brought forward from 2010 including motorway building projects.

• The Chancellor confirmed the Government’s intention to modernise the tax relief for business expenditure on cars as announced in the 2008 Budget in March. The existing arrangements will be replaced by an emissions-based approach from April 1, 2009 for corporation tax and April 6, 2009 for income tax. A technical note and draft legislation setting out the full detail will be published shortly.

The Society of Motor Manufacturers and Traders (SMMT) supports the substantial, but temporary, economic stimulus package announced in the pre-budget report. It provides positive incentives for consumers to begin spending, but will need to be accompanied by a more active approach to lending by banks and financial institutions.

Commenting on the report, Paul Everitt, SMMT chief executive said, “The chancellor has made a positive first step to help restore consumer confidence and kick-start responsible spending. We now need to see action to remove the constraints on credit and finance so consumers and businesses can take advantage of the changes announced today.”

Motor industry response to cut in VAT: “The 2.5% cut in VAT combined with the recent cuts in interest rates will encourage consumer spending, impacting on both the new and used vehicle markets. Any move to boost responsible spending is welcome but specific action to improve the affordability and accessibility of credit is needed if the vehicle market is really going to benefit,” said SMMT chief executive, Paul Everitt.

Motor industry response to postponement of VED rises: “Now is not the time to be increasing motoring taxes so the scrapping of penal increases to VED is welcome. We are disappointed the chancellor hasn’t taken the opportunity to reverse his plans for a first year rate of VED and would urge government to reconsider its approach to vehicle taxation policy, aligning it to EU CO2 legislation and providing a more consistent and long-term framework,” said SMMT chief executive, Paul Everitt.

The SMMT reiterated its call for government to implement a package of measures to bridge short-term cash flow problems created by the banking crisis.

“The motor industry faces a set of unprecedented market conditions. The dramatic fall in demand for new vehicles around the world, combined with the limited availability of funding and liquidity now puts at risk valuable industrial capability. Urgent action is required to boost demand for new vehicles and ease pressure on UK automotive suppliers,” said Paul Everitt.

Senior executives representing the UK automotive sector from component manufacturers, through vehicle producers and the retail network will meet the secretary of state for business, Lord Mandelson, on Thursday 27 November. The automotive sector is calling for support measures to include:

• Allowing manufacturers’ finance companies access to the funding available to banks through the special liquidity arrangements. This would allow them to support customers and their franchise networks.

• Scrapping plans for increased VED and new first year rate. This would provide a strong signal to buyers and help to improve residual values.

• Increased capital allowances for fleet buyers, particularly for buyers of commercial vehicles, to stimulate immediate demand.

• Shelve plans for reform of business car capital allowances, as overall impact and timing is unhelpful.

• Remove expensive car restrictions under capital allowances to help demand for UK higher end manufacturers.

And, manufacturing support to include:

• UK support for the European Investment Bank’s (EIB) proposed â‚Ź40bn automotive industry loan package so UK companies throughout the supply chain can support their operations and continue to invest during the economic downturn.

• National arrangements to allow manufacturers and suppliers access to loan facilities, including potential government guarantees, to maintain liquidity and investment.

• Help to speed up the allocation of existing funding to support training, R&D projects and energy efficiency measures. This would help upskill employees, accelerate innovation and provide an immediate stimulus for green collar jobs.

Leading trade body the Freight Transport Association (FTA) has condemned the Chancellor’s move to increase fuel duty to offset cuts in VAT. The FTA has warned that his decision is a cynical and disgraceful targeting of commercial vehicle operators to help fund his other tax give-aways.

James Hookham, FTA’s director of policy, said: “For a Chancellor who said he wanted to support British business through these troubled times, Alastair Darling has a cynical disregard for the cashflow problems of many small and medium sized commercial vehicle operators across the country. By offsetting the reduction in VAT with an increase in fuel duty, he has added thousands to the transport bills of companies across every sector. Not only does this hurt businesses directly, it also hurts the consumer, who will end up paying more to cover transport costs of items such as food, clothing and white goods. Christmas suddenly got even more expensive.”

The Chancellor’s Statement held few warm words for the logistics industry, but the ‘fuel duty snatch-back’ shows that the devil is in the detail. The Chancellor confirmed a further increase in fuel duty of 1.84 pence per litre in April 2009 and remained silent on the planned reintroduction of the fuel duty escalator from April 2010. This led FTA to issue another warning to its members: beware of bear traps which could be in store for business.

James Hookham continued: “As far as the logistics sector is concerned, the Chancellor is giving with one hand and taking away with the other. If he is determined to continue to use motorists as a cash cow, then businesses in the road haulage sector will suffer, possibly terminally. He has heard the arguments for the introduction of different fuel duty rates for car drivers and commercial vehicles: now he needs to act.”

While the commercial vehicle sector will be reeling, there was some light for the logistics industry with the abandonment of per-plane aviation tax proposals. The Chancellor will increase and expand air passenger duty, rather than place a further tax burden on air freight.

Christopher Snelling, FTA’s Head of Global Supply Chain Policy, said: “We will be looking at the proposals in detail, but, on the face of it, this is good news for all those involved in air freight. Credit should be given to the Government for taking the common sense approach. Air freight does have an environmental impact, but this needs to be addressed at the European level to avoid the UK being handicapped against continental rivals as a place to do business.”

The FTA welcomed Mr Darling’s announcement to invest in the motorway network, although it remained cautious until details of the proposed schemes are revealed.

The FTA also pointed to a missed opportunity for the Chancellor to bring much-needed funds into the Treasury coffers, and also to ensure overseas haulage vehicles pay their way. The Eurovignette, or ‘Britdisk’, was a Labour commitment in 2001, yet there has been little or no movement.

FTA Chief Economist Simon Chapman added: “At a time when the Treasury cupboards are bare, we are surprised that the Chancellor has not taken the opportunity to fill them with up to £30 million. We’ve been waiting for the Eurovignette for eight years, during which the number of overseas trucks on our roads has greatly increased. Surely the Chancellor is missing a trick?”

Meanwhile the Road Haulage Association has said it is both bitterly disappointed and angry that despite putting forward a strong case for UK hauliers that seemingly received a sympathetic response from Government, Chancellor of the Exchequer Alastair Darling has today announced an increase in fuel duty to compensate for the VAT reduction by 2.5 per cent.

“This is an outrageous announcement”, said RHA Chief Executive Roger King.  “We have been putting forward the case of unfair competition from foreign hauliers for many years. Indeed the Transport Select Committee itself made a case for measures to level the playing field between UK hauliers and their continental counterparts. Therefore this announcement represents not only a smack in the teeth for UK hauliers, but challenges the conclusion of Westminster’s own Select Committee.

“The Chancellor claims that the increase in duty is offset by a reduction in VAT.  But he does not seem to appreciate that while this may be true for motorists, it is NOT true for hauliers because they can reclaim VAT in full. So this represents a real increase in the industry’s operational costs and is not what we expected or what UK plc deserved.”

RHA National Chairman Andy Boyle added: “I am absolutely livid at this announcement. If things were not bad enough, it now seems that we have a Chancellor who does not understand his own tax system.”

Retail Motor Industry Federation (RMIF) Director Sue Robinson said: “The reduction in VAT means that car prices will fall, and could encourage consumers to return to showrooms. The VAT drop will also have an impact on the prices of thousands of other consumer goods and services, leaving cash-strapped households with more money to spend. This will help to restore consumer confidence, which is key to the revival of the overall economy.

“Delaying the introduction of changes to VED, and reducing the planned increases should reduce the burden on the motorist, and give the car market more time to adjust to the planned changes.

“Delaying the introduction of Corporation Tax increases planned for 2009 will be welcomed by business, but the Chancellor should have taken this move to its logical conclusion and scrapped the increase entirely. This would have been more beneficial to business in the long term.

“National Insurance increases will have a negative impact on both employees and employers, both of whom will be paying more. This means less money for individuals to spend, but perhaps more seriously, could also be a disincentive for potential employers who wish to take on more staff.”

Commenting on general measures included in the report, Ray Holloway, Director of the RMI Petrol Retailers Association (PRA) said: “The Chancellor’s good intentions are shown to be rather thin, through his plan to increase fuel duty to make up for the loss in VAT income from motor fuels. Some of the benefits motorists gained as fuel prices dropped following 2008’s record high fuel prices will now be lost. Motorists will have less money to spend elsewhere in the economy. The move will also have a negative impact on the UK’s hard-pressed fuel retailers, who also benefit when fuel prices are lower.”