VRT changes to cause swing to diesel

The impact of the widely expected changes to Vehicle Registration Tax (VRT) calculations on new cars, from engine size to CO2 emissions, is likely to see a strong sales swing to diesel cars next year. The Minister for Finance's plan anticipates that the measure will be budget neutral, with overall VRT - worth €1.3 billion to the Exchequer last year - not expected to rise as a result of the change.

Under the current system, cars with an engine size of 1,400cc or lower face a 22.5 per cent levy, while those between 1,401cc and 1,900cc attract the 25 per cent rate. Owners of larger engined vehicles, those above 1,901cc, pay 30 per cent.

However, under the Department's proposals, a new band of VRT ranging from 14 per cent to 36 per cent will apply to new cars from July, depending on the amount of CO2 emitted per kilometre. For example, a car emitting up to 120g will pay 14 per cent, those emitting up to 140g will pay 16 per cent, with a top rate of 36 per cent applying to cars emitting more than 225g per kilometre.

The changes are likely to produce some interesting purchasing patterns. For instance, a BMW 320d coupé currently faces a 30 per cent VRT rate. However, this model, and several others from the marque, are likely to benefit from having lower emissions than many smaller engined cars.

The 2.0-litre diesel engine in the 320d emits 128g/km, compared to 146 g/km for a 1.4-litre Hyundai Accent, or even 139g/km from a 1.2-litre Nissan Micra.

The result of the move could see the price of some more fuel-efficient - and lower emission - diesel cars fall by 10 per cent, while some larger petrol models will rise by a similar amount. The overall impact is likely to see Ireland move closer to the European norm, where diesel-engined cars account for around half the private vehicle fleet.

The change to Ireland's VRT system comes the day after the Finnish parliament agreed a similar change. Under the Finnish system, the tax rate is calculated by dividing a car's emissions by 10 and then adding four. So, for example, a new BMW emitting 128g/km would be subject to a 16.8 per cent tax rate. The Finnish tax band ranges from a minimum of 10 per cent to 40 per cent. Uncertainty during the past month, while the proposal was considered, had seen the new car market in Finland stall. However, with the new rules scheduled to apply from December 21st, new car sales are expected to recover.

Mr Cowen's move may also have an impact on excise duties from transport fuels. Currently, petrol is taxed at 44.27 cent a litre with a 0.48 cent national oil reserve (Nora) levy, and all topped off with 21 per cent VAT.

Diesel is taxed at the lower rate of 38 cent per litre, and also has a Nora levy and 21 per cent VAT. However, the new CO2-based regime may result in a significant sales rise for this fuel.

According to the Department of Finance, duties from petrol are worth €1.026 billion with a further €1.016 billion collected from diesel sales.

Yesterday the Society of the Irish Motor Industry (SIMI) said car sales this year were up 4.85 per cent, although they had slowed in November. SIMI chief executive Cyril McHugh said he was awaiting the detailed breakdown of the new rates for the CO2 bands before commenting on the changes.