Vehicle excise duty

Forecast process

The OBR commissions forecasts of VED receipts from HM Revenue and Customs for each fiscal event. The forecasts start by generating an in-year estimate for receipts in the current year, then use a model to forecast growth in receipts from that starting point. We provide HMRC with economic forecasts that are used to generate the tax forecasts. These are scrutinised in a challenge process that typically involves two rounds of meetings where HMRC analysts present forecasts to the Budget Responsibility Committee and OBR staff. This process allows the BRC to refine the assumptions and judgements that underpin the forecasts before they are published in our Economic and fiscal outlooks (EFOs).

Forecasting models

The forecasting model is based on DVLA data covering the entire vehicle stock, enabling vehicle types to be disaggregated into the many different VED bands.

Receipts are calculated by multiplying the stock of vehicles by the appropriate duty rate. Rates are indexed each year in line with RPI inflation (subject to any pre-announced policies) and rounded to either the nearest £1 or £5, depending on the tax band. Future vehicle stock levels are forecast by applying assumed vehicle scrappage rates to the existing vehicle stock and by adding expected new car sales.

The stock of vehicles paying VED is currently around 35 million, so new car sales make up a relatively small part of the stock each year. New cars also emit less CO₂ than the average of all cars, so attract lower first-year VED rates under the current system. The effect of new car sales on future VED rates was more pronounced under the previous system, where lower CO₂ emissions attracted permanently lower VED rates.

Main forecast determinants

The main determinants of our VED forecast are those related to the tax base and those that are used by the Government in setting parameters of the tax system.

• Inflation (RPI)

Main forecast judgements

The most important judgements in our VED forecast are related to the composition of the vehicle stock. Since most cars currently on UK roads were registered prior to April 2017, their VED payments are linked to official CO₂ emissions – so less fuel-efficient cars are liable to higher VED rates. Alongside those, we need to make several other forecast judgements. These include:

• In-year estimate – year-to-date receipts provide valuable information about the likely outturn for the current year. Judgements are made on whether to push any unexplained shortfall or excess through to our forecasts for future years.
• Efficiency gains in petrol or diesel vehicles and the shift to hybrids and fully electric vehicles (EVs) – over time a higher proportion of vehicles fall into lower VED bands, putting downward pressure on the VED forecast (although less so under the regime from April 2017 in which only first-year VED rates are affected and less so still under the regime from 2025 onwards that requires EVs to pay VED). The shift to fully electric vehicles now appears to be progressing more quickly than we had anticipated, as set out in in Box 3.3 of our March 2022 EFO.
• We might adjust the forecast of new car sales if we judge that they are likely to be higher or lower than the raw output from the econometric model. For example, an adjustment could be made to reflect the positive impact of any car scrappage schemes. Offsetting adjustments would then be made to later years to account for these sales being brought forward.
• Similarly, we might adjust the forecast of scrappage rates if we judge that older vehicles are being scrapped faster or slower than is currently assumed in our model.

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