Report on Motor Tax Rates and the effects

on the Motor Industry

______________________

By Aidan Timmons

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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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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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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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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

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€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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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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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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5.1 PRESENTATION

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