Forward Gear: The Adam Smith Institute’s ‘Reverse Gear’ analysis of Motability takes us in the wrong direction

In its research paper published today, ‘Reverse Gear – Why Motability is broken and how to fix it’, the Adam Smith Institute(ASI)  not only conflates two separate policy matters - Personal Independence Payments (PIP) and tax reliefs -  but ignores the very similar support given by the Government to high-income and (usually) non-disabled users of employer salary sacrifice schemes.  

PIPs are nothing to do with Motability

The key flaw in the ASI’s analysis is that those who receive PIP Mobility Allowances get the money regardless of whether they decide to use it for a Mobility lease. They can use it for public transport, they can buy or lease a used car, or they might use the money for other purposes.

I’m in no position to judge whether PIP Mobility allowances are set at the right level.  ASI claims that the tests have become ‘significantly easier to pass’. However Benefits and Work, a support organisation for applicants, reports that 52% of applications are successful and shows award levels by condition (for example 98% of motor neurone disease cases are accepted compared to 16% of stress incontinence cases).

Perhaps there’s a case for reviewing the Allowances, but it seems disingenuous to attach ‘blame’ to Motability for support that would be provided even if Motability didn’t exist (e.g. ASI’s headline ‘New Motability Vehicles Cost More Than The Entire Schools Repairs Budget’).

Cost of VAT relief overstated

Putting aside the PIP allowances, the main subsidy for for Motability is VAT, meaning that no VAT is charged on the lease payments. ASI claim that this relief, taken together with Insurance Premium Tax relief, cost taxpayers £1.2 billion per year (which will be mostly VAT).

Because the leases are all hire agreements (broadly, because there’s no purchase option) VAT, if charged, would apply to the entire monthly payment, covering both the supply of the goods (e.g. the car) and the supply of the financials service (interest). But that’s a quirk of the VAT rules. Most other car finance is through credit agreements (broadly, there’s a purchase option) where only the supply of the goods is subject to VAT. 

If we want to reach a meaningful assessment of the true cost of the VAT exemption, it’s probably best to separate the two supplies, and apply VAT only to the supply of the car.

Government support for other new cars

Almost two-thirds of the new car market in the UK is taken up by corporate fleet buyers, hire companies and employee salary sacrifice schemes. Each of these attract generous tax benefits.

Companies with car fleets and hire companies offset the tax against their taxable profit, saving on corporate taxes. Employers offering salary sacrifice schemes pay less national insurance to employees, while the employees pay less income tax, which particularly for electric cars can be a major saving.

These tax benefits will often considerably outweigh those offered to disabled drivers using the Mobility Scheme. It’s odd they don’t get a mention in the ASI paper.

Used cars

A key argument in the ASI paper is that Motability should offer used cars, not only new, to save taxpayers’ money.

ASI go on to rather destroy the case for this by suggesting that the used cars to be leased would be on average ten years old, rather than basing the approach on second-user cars of around three or four year.  Motability’s response was that used cars could then cost more to lease than new, due to repairs and maintenance costs.

Yet there could be something in this, particularly as more electric cars enter the used car market. As I have suggested in an earlier blog, either alongside or instead of subsidies for expensive new electric cars, the Government could support a Motability-type scheme for households with lower incomes to lease second-user (e.g. 3-year old) used EVs.

Social leasing in Europe

ASI note that we are approaching the 50th Anniversary of the creation of Motability, and it proposes proposes ending tax relief on Motability vehicles, tightening the criteria for eligibility and breaking its monopoly on provision (parts of what it calls its ‘Reverse Gear’).

At a time when a big initiative in Brussels is ‘social leasing’ with the idea of helping to support low-income households with essential mobility needs and access to low-emissions cars, we need to consider ways of building on Motability.

Engaging ‘Forward Gear’ rather than ASI's Reverse, could mean using Motability to help even more households to obtain affordable mobility, whether they include disabled people, or are low-income households who need cars for access to schools and work. Mobility as a fundamental right for the disabled, rather than a privilege, is the key principle of the Motability Foundation that could now be built on by policy makers.