New car prices set to rise but proposed tax changes may reduce the hit

New car prices look set to rise. That’s bad news for a motor trade already suffering under a flood of used imports. If there is good news from the proposed changes to the motor tax regime put forward last week by the Government’s tax strategy group, it’s that the rise in prices could be about €2,000 on the cost of the average new car, while under the proposals they might be closer to €500.

At the heart of the issue is the European-wide adoption of a new, stricter emissions-testing regime, known as WLTP. These tests mean that most new cars now carry a higher official emissions figure. And that matters a lot on the Irish market, where emissions figures set not only the Vehicle Registration Tax (VRT) paid on new cars and used imports, but also the annual motor tax.

The tax strategy group proposals would mean changes to the tax bands, punishing dirtier cars, but cutting the rates applied to cleaner ones.

I think our one concern would be that if all measures are implemented it would actually see an increase in VRT

As Brian Cooke, director-general of the Society of the Irish Motor Industry (SIMI), explains: "If they adopted WLTP on the current system, the average car price would go up by about €2,000. On the proposals from the strategy group, by our calculations, the average prices will go up by between €500 and €600. So they have taken account of the fact that the WLTP ratings for cars is higher than the old system."

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Reticent

Cooke is reticent to actually welcome the proposals to roll out new taxes, but he says he understands the thinking behind them.

“I think our one concern would be that if all measures are implemented it would actually see an increase in Vehicle Registration Tax. Notwithstanding that, we do appreciate that there is an increased environmental focus, which is the purpose of what they’re trying to achieve.

“The potential addition of a Nitrogen Oxide [NOx] surcharge, which would be higher on used imports, particularly older used imports [than on cleaner and more efficient new cars] is something we would welcome.”

It seems strange to welcome taxes that could push up prices at a time when new car sales are suffering, but the strategy group’s proposals chime with the Government’s wider environmental agenda, and the motor trade is eager not to be held out as a polluting pariah.

Even the proposed removal of hybrid grants has not sent the likes of Toyota – which abandoned diesel in its passenger car fleet in favour of hybrids – into a rage. In fact its strategy, innovation and corporate affairs director, Mark Teevan, reckons the benefit of several more bands below the current 14 per cent base rate would help compensate for the potential loss of tax relief.
"We will also be exploring the possibility of requesting an extension of even a part of the current grant," he says.

Lower VRT rate

However, he highlights the fact that, under the proposals, Toyota’s hybrids would benefit from the lower VRT rate, potentially lower motor tax, while the proposed introduction of a surcharge based on air-polluting NOx emissions would hit conventional petrol and diesel rivals far harder than hybrids. If they were to be introduced – replacing the current 1 per cent diesel surcharge on new and used imports, Teevan sees it as addressing growing concerns about air quality, while also creating another incentive for buyers to opt for cleaner hybrids or electric cars.

For consumers, while the proposals would mean price rises on the current crop of new cars on sale, new lower emissions models due to be introduced by most major brands within the next two years will flip that, with customers benefitting from the cuts to the tax rates for vehicles below 50g/km, for example.

According to Cooke: “CO2 values are going to come down and at some stage in the future the cars supplied into the Irish market will actually fit the proposed tax bands better than they currently do. That’s more likely to be from 2021.”

However, already there are many new models that will benefit from the proposed band changes, which effectively reduce the rate paid on cars with emissions below 130g/km. In particular the new  7 per cent rate for cars with emissions below 50g/km would be a big boon for plug-in hybrids.

The fear is that any changes will lead to uncertainty among consumers, and bring back bad memories of 2008 when the motor tax regime changed from being based on engine size to CO2 emissions.

The principle of an NOx tax is a good idea, but what is going to determine the level of used imports is Brexit and sterling

“That concern is there. If you look back at what happened, there was a residual value crisis, at a time of an economic crisis. Any rebalancing of the tax system always has the potential to impact on residual values. However, the proposals are still chiefly a CO2-based tax regime, whereas the last time it was a complete change, so it may be less likely to have as big an impact on resale values,” says Cooke.

Penalise

One factor dealers may welcome is the NOx surcharge, as it will penalise the older, dirtier cars being imported into the country. “As an industry we need to deliver big emission savings over the next decade and the only way we can do that is by increasing the sales of cleaner new cars,” says Cooke. “Right now the balance is so wrong.

“I think the proposed changes would only be a start. The principle of an NOx tax is a good idea, but what is going to determine the level of used imports is Brexit and sterling. Taxation systems should be able to help, but they may not be able to do the whole job. I think if we have a hard Brexit, then there is greater scope for the Government to do something, and I think they could even increase the checks on cars, and insist on an NCT test for all UK used imports. As they are not emanating from the EU anymore they can roll out several measures.”

Consumers may be opting to wait and see what the Minister for Finance, Paschal Donohoe, decides to do in his budget speech in October. By the end of that month we might also have some clarity on Brexit.

It may well be a landmark month for both motorists and the motor trade.