Phil Hogan (Carlow-Kilkenny, Fine Gael)

I move: "That the Bill be now read a Second Time."

I am pleased to open the debate in the Dáil on the Motor Vehicles (Duties and Licences) Bill 2012. The primary purpose of the Bill is to give legislative effect to the increases in motor tax rates and trade plate licences contained in the financial resolution on motor tax passed by the Dáil on budget day, 6 December 2011.

The new rates apply to motor tax discs and trade licences taken out for periods beginning on or after 1 January 2012. The Bill provides for the same increases in motor tax as contained in the financial resolution, namely an increase of 7.5% applied across most categories of vehicle and to trade licences. As set out in the financial resolution, there was an exception for private vehicles in the lower CO2 bands A to C with higher flat rate increases. Band A rises from €104 to €160, Band B rises from €156 to €225 and Band C rises from €302 to €330. It is anticipated that the proposed increases in motor tax rates will raise some €46.5 million extra in respect of 2012.

As announced in the budget, broader or longer-term changes to the motor taxation system are to be considered as part of the review of the carbon banding of VRT and motor tax currently under way. This review is being carried out jointly by the Minister for Finance and by myself as Minister for the Environment, Community and Local Government. It is my intention that the twin priorities of ensuring the protection of the tax base and revenues under both headings and the positive environmental impact of the existing basis of taxation will be carried through to the future. A consultation paper is available on the Department of Finance website and the closing date for submissions is 1 March next.

While the levels of increase announced for the lower CO2 bands are higher in percentage terms than the rest of the fleet, they must be viewed against a structure that left the bottom rates very low. It is also important to note that the underlying structure of the banding system has not been changed, and there remains a positive incentive to purchase low CO2 cars.

It also must be remembered that, while the introduction of the CO2 bands was designed to encourage a switch to lower emission vehicles, the changes were introduced on a second principle of revenue neutrality. It has always been the intention that the motor taxation system is kept under review to ensure that it meets these twin objectives over the years. The reality is that there has been a significant loss of motor tax income over recent years as the number of vehicles taxed on the basis of CO2 emissions has increased by about 5% year on year. At the end of January 2012, the CO2 fleet of cars comprised 18.8% of all cars on the road. Of these, more than 315,000, representing 89% of the CO2 fleet, are taxed at the three lowest bands. While this is very welcome from an environmental perspective, it has represented an increasing loss to the local government fund.

Receipts have been reduced from €1.06 billion in 2008 to €1.01 billion last year. Following the budget, the average motor tax payment for vehicles in the CO2 system is €274. For those taxed on engine capacity, the average payment is €478. Once the older cars are all replaced by cars taxed on the basis of CO2 over the next 15 years or so, it is estimated that total motor tax from cars will fall by more than 40%. In the current economic circumstances and given the need to maintain a diversified and stable taxation system, this loss of income represents an opportunity cost that must be rectified.

Deputies will be aware of the significant role that the local government fund has played in the financing of local government since it was established in 1999. The fund has hitherto been financed from a combination of an Exchequer contribution and the full proceeds of motor taxation. However, in this instance, the increase in income from the proposed rate increases will be transferred to the Exchequer. This is a necessary measure towards the reduction of the national debt. The wording of an amendment to the Local Government Act 1998 to allow for the legislative underpinning of such a transfer is close to finalisation and I will introduce an additional section to the Bill on Committee Stage.

Exchequer funding of local authorities' day-to-day activities cannot be immune as part of the effort to close the gap between income and expenditure in the public finances, and the Members will already be aware that the 2012 Exchequer allocation to local government has been reduced by €164 million compared with 2011. However, I stress that the Government is committed to supporting the local government fund and it will retain the income from the existing rates of motor tax. The establishment of the local government fund and its funding, in part, from motor tax receipts has created an important link between the amount of tax paid by motorists and the visible and concrete service they get for that tax in terms of better roads. An amount of €404.7 million has been allocated to the Department of Transport from the local government fund for 2012 for roads and public transport infrastructure.

Turning to the provisions of the Bill, it contains six sections and a Schedule. Section 1 and section 6 are procedural. Section 2 sets out that the rates apply to licences taken out for periods commencing on or after 1 January 2012. Section 3 provides for the Schedule to the Bill, which contains the new rates, to replace the existing Schedule in motor tax legislation. Section 4 provides for the increase to apply to vintage or veteran vehicles. It also contains a minor amendment to the definition of "CO2 emissions". Section 5 provides for the increases that apply to trade plates and replacement trade plates. The Schedule sets out the new annual motor tax rates for all other vehicles.

I would like to highlight to the House what the new tax rates means in real cash terms in regard to private cars and goods vehicles which make up over 91% of the national fleet. For private cars taxed on the basis of engine size, the extra cost will be between €13 and €35 a year for vehicles up to 1,700 cc. This relates to 68% of all cars taxed on engine capacity. For cars up to 2.5 litres the annual increases will be from €41 to €70 and from 2.5 litres upwards, which account for 2.5% of the engine capacity fleet, an additional €84 to €117 per year. For vehicles taxed on the basis of CO2, the D to G bands increase by between €34 and €158 per year. For cars in Band A, which account for 26.1% of the CO2 car fleet, the annual rate increase is €56, from €104 to €160. For cars in band B, which account for 45.7% of the CO2 car fleet, the annual rate increase is €69, from €156 to €225. For cars in band C, which account for 16.9% of the CO2 car fleet, the annual rate increase is €28, from €302 to €330. Again, I must stress that these increases apply to rates that were set at very low levels.

For goods vehicles, the effect of the 7.5% increase will vary depending on the size of the vehicle in weight terms,. Some 90% of vehicles in this category are at the lowest level of charge, meaning that they will pay €310, representing an annual increase of €13 or 25 cent per week.

The vehicles that make up the remainder of the national fleet consist mainly of agricultural vehicles, motorcycles, vintage vehicles and small public service vehicles. All these vehicles have a separate tax class with a concessionary rate of tax on or under €95 after the increase of 7.5% has been applied.

A 7.5% increase is also proposed for trade licences, or trade plates as they are known. These are the registration plates used by motor traders on vehicles, which are temporarily in their possession, in lieu of taxing such vehicles. While there are strict restrictions on the use of the plates, they are transferable between vehicles. The increase for a pair of trade plates will be €23 per annum.

Three minor technical amendments are also contained in the Bill. Section 4 contains a minor technical change to relate the definition of "CO2 emissions" directly to the Finance Acts definition used for VRT purposes. The amendment in this Bill means that all the relevant definitions are common to both motor tax and VRT and ensures uniformity across both tax systems.

Part 4 of the Schedule provides for an amended definition of motor caravan. Between 1998, when a concessionary rate for motor caravans was first introduced, and 2010, the same definitions applied for VRT and motor tax purposes. The Finance Act 2010 amended the definition of motor caravan for VRT purposes to ensure conformity with an EU definition. This is the first opportunity to make a parallel amendment to the Finance (Excise Duties)(Vehicles) Act 1952 to apply the same definition for motor tax purposes. Different definitions for VRT and motor tax purposes give rise to potential confusion and the possibility of different regimes for the same vehicle under both codes.

The final amendment relates to the change in classification of passenger vehicles from category A to the EU-defined category M1. This is contained in part 6(g) of the Schedule. A provision was introduced in the Motor Vehicles (Duties and Licences) (No. 2) Act 2008 to provide that passenger vehicles registered elsewhere in the first half of 2008 and subsequently registered in the State were eligible for taxation on the basis of CO2 emissions. Passenger vehicles were classified as category A vehicles at the time.

From 1 January 2011, the Revenue Commissioners introduced a revised vehicle categorisation system for VRT purposes. The revised system reflects the categories used for the classification of vehicles at European level, as set out under a number of EC directives, including those relating to the type approval of passenger vehicles. Where a new or used vehicle is being registered in the State, use of an EU vehicle classification is now mandatory. The amendment to the Schedule reflects the current VRT EU classification for motor vehicles. The EU classification is equivalent to the pre-2011 Revenue VRT category, that is, EU classification M1 is normally equivalent to Revenue category A passenger vehicles and accordingly liability for motor tax will remain unchanged. Again, the purpose is to ensure uniformity between the tax codes and consistency of treatment of vehicles.

I will be proposing a further section to the Bill on Committee Stage intended to ensure that vehicles registered in the first half of 2008 are fixed on one system of charging for motor tax, that is, either on the basis of engine capacity or on the basis of carbon emissions, as applied to each vehicle type in the period from 2008 to budget 2012.

The background is as follows. The Motor Vehicles (Duties and Licences) Act 2008 introduced the system of motor taxation based on the CO2 emissions for private cars registered from 1 July 2008. It also inserted a provision, in paragraph (6)(f) of Part 1 of the Schedule, that new cars registered between January and June 2008 shall pay motor tax on the basis of CO2 emissions from 1 July 2008, where the CO2 rate would have been lower had the relevant provisions applied. This was a concession to purchasers of vehicles in the first half of the year to allow them benefit from the generally lower rates of motor tax based on CO2 emissions.

Using different wording, a similar provision was subsequently made in the Motor Vehicles (Duties and Licences) (No. 2) Act 2008 so that imports first registered outside the State between 1 January and 30 June 2008 could avail of the lower of the two rates. This is laid out in paragraph (6)(g) of Part 1 of the Schedule to the Motor Vehicles (Duties and Licences) (No. 2) Act 2008.

The first increase in rates since that time was in budget 2012. The approach taken in Financial Resolution No. 2 was to replicate the provisions of the legislation generally, including paragraphs (6)(f) and (6)(g) in respect of vehicles first registered between January and June 2008, and to list the increased rates of tax against each category of vehicle. This has had an unintended consequence for the rates that apply to a small number of vehicles first registered outside the State between January and June 2008, mainly those in CO2 band B, with an engine capacity of less than 1,000 cc. Hitherto, the CO2 band B rate was lower than the engine capacity rate, at €156 annually as opposed to €172. Following the increase, the CO2 rate is €225, whereas the current engine capacity rate is €185; post-budget, the CO2 rate is now €40 higher, rather than €16 lower as it was pre-budget.

When this inadvertent effect became evident over the Christmas period, refunds were made to two owners who had already paid at the incorrect rate. Arrangements were also made to switch affected vehicles due to be taxed to the engine capacity rate, and this is currently being done on a month-by-month basis. It is estimated that over the course of the year, some 67 vehicles in total are involved.

There is now an inequity in the system whereby a particular group of vehicles, i.e. the specific cohort of second-hand imports referred to above, are switched to the lower of the two applicable rates as changes to motor tax rates occur. At present, a very small group of vehicles is affected; however, as rates are likely to change over the coming years, including as a result of the current review of VRT and motor tax, there is potential for a greater number of vehicles to fall to be switched back and forth between the two systems of taxation. This was never the intention when CO2 taxation was introduced in 2008, and aside from potentially increasing inequity in the treatment of taxpayers, it would be administratively very difficult to manage and explain. I intend to ensure that the taxation structure that applied immediately pre-budget will continue into the future for affected vehicles.

There is also the potential for alternative interpretations to be taken from the wording of the provisions relating to vehicles registered in the State in the first half of 2008. This is interpreted, as intended, that vehicles remain in the taxation structure applied to them in respect of licences taken out after 1 July 2008. However, the wording of the provision is such that it is also potentially possible to interpret it as meaning that the CO2 rate should be paid only where it is less than the prevailing cubic capacity rate for the vehicle. Again, it was never the intention, on the introduction of the 2008 Act, that such vehicles would be able to flip back and forth depending on which basis of taxation was more favourable at a particular time. Rather, the intention was that such vehicles would move permanently to the CO2 system of taxation. I see no equitable justification for treating vehicles registered in the first six months of 2008 more favourably than all other vehicles. Accordingly, I will be proposing on Committee Stage to provide that vehicles first registered outside the State in the first six months of 2008 will, from the date of enactment of the Bill, be fixed on whichever of the two charging systems (CO2 or engine capacity) applied to them prior to the recent rate increases. I will also propose, for the avoidance of doubt, to provide that vehicles first registered in the State between January and June 2008 are also fixed on whichever of the charging systems applied prior to the rate increases. This provides equity with respect to all other vehicles registered after 1 July 2008, for which owners have no choice in the matter but are locked into the CO2 system.

In summary, this is a short Bill with the purpose of giving permanent legal standing to the increases in motor tax introduced by the Financial Resolution passed by Dáil Éireann on 6 December 2011. I commend it to the House.

See this speech in context