Rachel Reeves considers major change to Motability scheme to save £1billion

Chancellor Rachel Reeves is looking at scrapping tax breaks, which allows cars leased under the Motability scheme to be exempt from VAT or insurance premium tax

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Rachel Reeves is considering reforms to the Motability scheme which allows disabled people to access cars through the benefits system.

The Chancellor is looking at scrapping tax breaks worth around £1billion a year, cutting an exemption which allows cars leased under the scheme to be exempt from VAT or insurance premium tax. BMWs, Mercedes and other luxury cars could also be removed from the scheme, according to The Times.

Around 860,000 disabled people use the scheme, which is open to people who claim a qualifying mobility allowance, usually through the Personal Independence Payment (PIP).

Removing the tax breaks would mean more claimants need to make an advance payment for their cars.

Under the scheme, claimants can exchange all or part of their mobility allowance for a vehicle but they most pay up front if the cost of a larger or more expensive vehicle exceeds it.

James Taylor of the charity Scope warned that scrapping tax breaks “could heap extra costs onto disabled people all over Britain.

"Restricting eligibility to Motability could hit disabled people on lower incomes hard.”

It is understood that no decision has been taken as Ms Reeves weighs her options ahead of next month's Budget.

Today, the Chancellor said she can't "leave welfare untouched" without hiking taxes and cutting spending on schools and hospitals.

The Government was forced into a retreat over botched disability benefit cuts by Labour MPs earlier this year.

But Work and Pensions Secretary Pat McFadden has signalled another attempt will be made to slash the welfare bill.

Ms Reeves said that MPs who previously voted against changes "recognise the welfare system is not working".

She told Channel 4: "You know we've now committed to doing reform in a different way, but we can't leave welfare untouched.

"We can't get to the end of this Parliamentary session and I've done nothing, basically.

"Because if more and more of our money that we spend as a government is spent on welfare, you've got less for the NHS, you've got less on schools and you have to put more on people's taxes."

Ms Reeves has signalled that she is considering tax rises at the Budget next month to plug a massive shortfall in the public finances.

The Institute for Fiscal Studies estimates the Chancellor needs to find some £22billion to balance the books.

An HM Treasury spokesperson said: “We do not comment on speculation around changes to tax outside of fiscal events.”