The pre-Budget submission sent to government for consideration in Budget 2012. Subsequently sent through recommended channels for examination during 2012 for Budget 2013 motor tax system overhaul.
1. Report on Motor Tax Rates and the effects
on the Motor Industry
______________________
By Aidan Timmons
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2. Contents:
1.1 Introduction 3
1.2 The pre-2008 market 3
1.3 The revised system 4
2.1 The effects on the daily business of the motor trade 4
2.2 Impacts on residual values - the anti-petrol mentality 5
3.1 The newly revised system 5
3.2 Benefits of the newly revised system 6
3.3 Implementing the proposed system 6
4.1 Outlook for the industry 7
4.2 Scope for readjustment 7
4.3 Conclusion 8
4.4 E&OE 8
5.1 Presentation 9-14
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3. 1.1 INTRODUCTION
The motor industry provides a workable barometer for the performance of the economic
system as a whole. For most consumers, a vehicle is the second greatest expense to their
home. Once credit is freely available, employment secured and cash on reserve is at an
acceptable level, customers satisfy their appetites for owning a new vehicle. When any of
these caveats are threatened, the consumer is faced with an option of taking a risk or
playing it safe. Invariably, over the previous 3 years we have seen the latter become par for
the course in the motor trade. In instances such as these consumers extend their periods of
ownership, new cars sales plummet and the residual values of vehicles in ordinary
circumstances should remain at acceptable levels. However, the change in motor tax rates
heralded by the previous government in Budget 2008 served to disrupt the market for a
number of reasons which this report will investigate.
1.2 THE PRE-2008 MARKET
The new and used car market in the years up to 2008 was obviously bolstered by the
dramatic growth in the economy. New car sales in 2007 tipped 186,238 and most dealers
had completed expensive refurbishing as a result of “bloc exemption” (see Article 101 (1)
Treaty on the Functioning of the European Union). In the used car market, values remained
strong and while many chose to use the low rate finance options offered from various
operators to purchase new vehicles, there existed sufficient demand for used vehicles thus
ensuring residual values remained closely aligned to market norms. The motor tax system,
based on engine capacity had endured some nominal increases in previous budgets,
however its fairness meant increases were absorbed by the customer on a level footing.
From an environmental point of view the majority of used cars sold in the years previously
were soon to be rendered as entirely unsatisfactory for our national carbon footprint
impression. This, above all else was the basis for change and while the intention behind the
new structure was commendable the method in which it was implemented left the industry
reeling from its inadequacies.
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4. 1.3 THE REVISED SYSTEM
Budget 2008 stated that as of July 2008, all new vehicles would conform to a revised tax
system (the system currently in place). In 2007 petrol vehicles accounted for 71.99%1 with
diesel models accounting for 21.99%2. In 2008 these figures became 62.86%3 for petrol
and 34.5%4 for diesel [In both of these instances the unaccounted for percentages relates to
an accumulation of hybrid and flexi fuel (those running on bio ethanol) vehicles]. Fast
forward to 2010 and the numbers provide a startling snapshot of the complete reversal in
consumer buying habits and ultimately the tax take from VRT, VAT and motor tax. Last year
the fuel divide was split 70.99% to 27.99% in favour of diesel models and for the year to
date diesel represents 71.21% of all new car sales.5 However, these figures provide an
insight to only a very limited part of the overall picture. The fact is that many
manufacturers have managed to concentrate the majority of their ranges in the two lowest
VRT bands. Despite the size of the vehicle, advances in emission technology has given rise
to a situation where a €60,000 vehicle attracts the same motor tax rate as one priced at
€10,000. Apart from the obvious inequality of such a system, the ramifications for used
vehicle values are substantial as only those with low motor tax are sought after.
2.1 THE EFFECTS ON THE DAILY BUSINESS OF THE
MOTOR TRADE
Since 2008 the new car sales figures have provided frightening reading. Operating at a
fraction of what they used to and indeed borrowed against has put many previously viable
and prominent dealers out of business. When the EU directive, bloc exemption, was
introduced it provided a standard for how a showroom should be spaced and the necessary
equipment to be provided for customers. Dealers dutifully followed suit. With many
dealers showrooms being rendered inadequate as per the new regulation, and faced with
the reality of losing their franchise due to non-conformity, dealers set about purchasing
land, building new showrooms and hiring staff off the back of a projected market
thousands of units higher than the market currently sits.
1 www.beepbeep.ie/stats
2 Ibid.
3 ibid
4 ibid
5 ibid
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5. 2.2 IMPACTS ON RESIDUAL VALUES - THE ANTI PETROL
MENTALITY
The change in motor tax has had a detrimental effect on pre-2008 petrol models which as
this report has already highlighted, accounted for almost three quarters of the overall
market in the years preceding the change. The reason for the swing in customer attitude
was obvious. They simply did not want to pay more tax. While this sounds like a false
economy, considering the overall net gain from owning a diesel model when annual
mileage dictates the owner should be driving a petrol model is either negligible or
nonexistent, it nonetheless is the reality of the market today. We are now presented with a
phenomenon I have come to term "buying the motor tax" and despite the obvious
implications it has for the owner in terms of requiring additional finance, and the possible
exposure to finance companies should these deals be reneged upon, the subsequent effects
on the daily business of the motor dealer is extraordinary. Job losses in the sector have
risen sharply in the previous 3 years and without any sign of direct investment, the
likelihood is that this trend may very well continue. When a customer buys a car based
solely on its motor tax rate and not for its various other benefits there is something
fundamentally wrong with the system.
3.1 THE NEWLY REVISED SYSTEM
The system which the accompanying presentation sets forward seeks to ensure 3 key
outcomes. The first is that the residual values of vehicles are protected by indirect threats.
While competition in the market place is obviously of benefit to the customer, it should not
be the case that a car is discriminated against based on its motor tax rate. The second key
focus is to retain jobs in the sector. Busier forecourts mean dealers require more staff and
higher new car registrations safeguard the work shop segment when these vehicles require
servicing. Thirdly, the loss of revenue from the exchequer in relation to the tax take from
motor tax must be substantial. Whilst I can only speculate as to the actual loss, it is worth
noting that currently Category A cars which attract €104 annual charge account for 42.12%
of overall new car sales whilst in 2007 this figure was just 1.48%. Furthermore, the number
of medium family cars sold in 2011 stands at 13,012 when in 2007 this figure was 27,000.
6We can safely assume that today most of these vehicles occupy bands A and B on the
motor tax chart but allow the average figure to be a €156 annual charge and we can
estimate the tax take for this class of vehicle to be €2,029,782. Similarly it is perfectly
acceptable to assume that medium family saloons have previously been 1.6 litre engined
and therefore were subject to an annual charge of €445, which translated into an
approximate tax take for this class under the old engine size tax system returns a value of
6
www.beepbeep.ie/stats
A. Timmons 5|Page
6. €5,790,340 for the same number of vehicles sold. With my proposed system the 13,012
units would yield a return of €3,643,360.
3.2 BENEFITS OF THE NEWLY REVISED SYSTEM
The proposed changes to the existing system ensure increased revenue through motor tax.
Moreover, as manufacturers continue to produce increasingly carbon efficient vehicles in
both fuel types the likelihood will be that a significant percentage of new car sales will
attract the two lowest motor tax rates. The vehicles taxed under the current system's
residual values will also be bolstered by the fact that in all but a few instances the proposed
system does not provide a cheaper alternative. With this in mind, values for used cars
should remain less susceptible to dramatic fluctuations. The system continues to uphold
the importance in reducing the country’s carbon footprint and the system in no way
incentivizes the purchasing of higher CO2 value models despite the fall in the upper rates.
The simple fact is that most of these Category G vehicles under the current rate are pitched
in the luxury end of the market and in turn, their prospective purchasers may not be
deterred by the €2100 annual motor tax charge. It is not until these vehicles return to the
market as used vehicles that difficulties arise in obtaining sensible residual values so as to
ensure the buyers in this domain are not punished by an astronomical motor tax fee.
3.3 IMPLEMENTING THE PROPOSED SYSTEM
The additional bands are relatively easy to implement in that vehicle dimensions can be
readily obtained from the relevant distributors. The most time consuming element will be
reaching a consensus on the segmentation of vehicles into their particular grouping but this
issue can be easily resolved once a framework for establishing a basis for selection is
developed ie: Estate models can be grouped into the saloon category depending on the
saloon's classification (family car, compact executive or luxury). A technical group
including Motor Trade Publishers should be established to arrive at a workable structure
for defining which vehicles belong to each group. In the vast majority of cases these will be
instantly identifiable and only a small percentage of each manufacturer’s fleet will require
closer investigation.
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7. 4.1 OUTLOOK FOR THE INDUSTRY
Should the present system remain unchanged the industry will continue to battle
fluctuations in values as a result of the inconsistencies in motor tax charges for similar
models. This directly affects the volume of vehicles dealers can practically and profitably
trade in thus forcing some consumers to keep their vehicles longer as the cost to change
may be too great. Furthermore, with finance companies adopting much stricter criteria for
borrowing, dealers have to turn away possibly viable deals. A new advance in diesel fuel
technology also has potential to pose a threat to the reputation of the industry. Whilst more
consumers purchased diesel models, not for their efficiency but rather for the low rate of
motor tax, their driving habits have remained unchanged. Today's diesel models largely
feature a component known as a Depollution Particle Filter or DPF. Without proper use,
this filter clogs and thus requires replacing at a cost of circa €1,000. While information
regarding the fiscal dangers of not utilizing a diesel to its recommended ability are readily
available, customers seem undeterred by the potential outlay and continue to purchase
diesel models in favour of their petrol counterparts. While this may not be an issue today,
the customers may well opt to revert to petrol models in the future and thus we may see an
influx of diesel models back to dealerships in a negative fashion. That is not to say that this
report has an unfavourable bias towards diesel fuel types, but it serves to highlight the
massive swing in customer attitude as a result of the misguided system introduced by the
previous government.
4.2 SCOPE FOR READJUSTMENT
The proposed system's framework provides a solid basis from which to introduce higher
motor tax rates. In future, consumer buying habits can be tracked and should a drop in
revenue in a particular segment occur certain categories can be loaded without having to
amend the system as a whole. Furthermore, should the government decide, the CO2
parameters can also be changed but we advise that this requires far more stringent
investigation and should not be on the table for the forthcoming Budget 2012.
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8. 4.3 CONCLUSION
It is the recommendation of this report that motor tax rates be reconsidered in light of the
complete reversal of consumer buying habits, dramatic drop in used car residual values
and the loss of revenue from motor tax. Consumers have reportedly resorted to "buying the
motor tax" and the new car selling price bears far less significance in their decision-making
process. The industry is still in very real danger of suffering further dealership closures
resulting in unemployment and an increased burden on the State. As independent analysts
of the market, we have examined the changes in residual values over the previous 30 years
and while we have reached an unprecedented global economic juncture, the motor
industry will fail to grow if measures such as those outlined in this report or continuance of
the Scrappage Scheme are not implemented. It is the prediction of this report that revenue
from motor tax will remain largely insignificant despite any potential surge in new car sales
as most vehicles will belong to Categories A & B and therefore attract a far too reduced
level of motor tax.
4.4 E&OE
All of the statistics produced in this document have been sourced from the Society of the
Irish Motor Industry and their website www.beepbeep.ie/stats and also relevant
associations as well as and including the Central Statistics Office. This report recognises
that the figures contained herewith may contain inaccuracies comparing to official
government data and accepts no responsibility for the accuracy of same. This report also
recognises that it is also purely an advisory document.
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