The project, Electronic Licensing for Fleets (ELF), looked at giving fleets the opportunity to re-licence vehicles en masse digitally and for the fleet life of the vehicle, rather than annually.
Currently the system is onerous and time consuming, with each vehicle needing to be taxed individually.
Some large fleets and leasing companies even resort to paying employees to stand in line at the post office all day re-taxing vehicles.
In a statement, the DVLA said: “The agency fully realises that these decisions will be a massive disappointment to the UK’s motor industry.
“However, the need to deliver value for public money and safeguard the agency’s core business systems is paramount and has to take priority.”
The British Vehicle Rental and Leasing Association, which had been lobbying hard to see the project reach fruition, reacted with shock.
John Lewis, BVRLA director general said: “Quite frankly, I am at a loss to see why the DVLA has cancelled this project.
“We are deeply disappointed that the DVLA, without any consultation with those who would have seen significant benefits, has decided not proceed despite the advantages that would have accrued to both the fleet industry and the DVLA itself.
“I see the decision as not only short sighted but also damaging to the government’s programme to simplify and remove red tape.
“Our members, along with other industry sectors, have expended a considerable amount of time and resources in assisting the DVLA with this project through the Industry Liaison Group.
“Now, it seems all that time, money and effort has been cast aside without even the courtesy of prior consultation with us.
“The first we knew of the cancellation was after the decision had been taken.”
In the 2007/2008 DVLA Business Plan, it states that ELF “roll-out will commence in 2008”.
However, it seems that since that was published, its position has shifted.
The statement added: “The DVLA Executive Review Board reviewed the current development projects and programmes in order to prioritise the key elements and confirm that the benefits originally identified could still be delivered and that the overall programme of work was deliverable.
“The ELF project was at a very early stage and, while some market research had been undertaken, the agency and key stakeholders had not made any investment in system development.”
It said that any further review of the vehicle licensing system would listen to fleet concerns.