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Spotlight on…The tax benefits of electric cars

In this edition of our Spotlight series, Employment Tax specialist Jo How and VAT Partner Simon Newark are talking about electric cars.

Those of us reflecting on what we can personally do to positively impact climate change may be thinking of changing our car to something ‘greener’ or maybe even the company cars employees use in our business. This ‘Spotlight on’ discusses the range of tax benefits electric cars can bring to a business together with comments on the VAT treatment.

What do you need to know?

There are a number of tax benefits for businesses to introduce electric cars to their workforce, whether that is a fleet of several hundred cars or just one or two.

Benefits in kind (BIK)

The percentage of list price of a company car which is taxed as a benefit is determined by the CO2 emissions of the vehicle. For 2021/22, low emission cars (up to 50g/km) are taxed at 1% of list price rising to 2% for 2022/23. The percentages are also lower for electric hybrids than for traditional petrol/diesel cars depending on their electric-only range.

For example, a plugin hybrid with CO2 levels of 32 g/km and an electric only range of between 30 and 39 miles would have a benefit rate of 12% in 2021/22.

Salary sacrifice

Where an employee has a car provided under salary sacrifice, the benefit is valued as the higher of the amount of salary given up or the taxable benefit. However, the rules do not apply if the company car has CO2 emissions of less than 75g/km. So an employee with a low emissions car of less than 50g/km and a list price of £50,000 would have a BIK charge of £500 for 2021/22 regardless of the amount of salary sacrificed.

Capital allowances

The rate that can be claimed by a business depends on the CO2 emissions of the car and the date it was purchased. Here we focus on cars purchased from April 2021 onwards:

  • For new and unused cars where CO2 emissions are 0g/km (or the car is electric), a business can deduct the full cost from profits before tax
  • For new, unused and second-hand cars where CO2 emissions are between 1g/km and 50g/km (or the car is electric), a writing down allowance of 18% can be claimed
  • For new or second-hand cars with CO2 emissions above 50g/km, a business can claim a writing down allowance of 6%

Note, capital allowances are only available to businesses (including sole traders) and not individuals purchasing cars for their own private use.

If an electric car is leased by a business instead of purchased, the monthly payments are deductible (from April 2021) as follows:

  • Provided the car has emissions of 50g/km or below, the full monthly payments are deductible expenses that can be set against profits, which leads to a tax saving
  • For cars with emissions above 50g/km, 85% of the monthly payments can be claimed

Tax contradictions

It is unfortunate, however, that these worthwhile incentives to encourage the take up of electric vehicles by employees as company cars are not reflected in the Government’s VAT policies which are in favour of petrol and diesel cars, contrary to the green agenda.

VAT registered businesses are entitled to claim refunds of the VAT cost on charging electric vehicles used for business purposes, but only if the electric vehicle is charged at the business premises. One has to question how many businesses (particularly smaller ones) have the space to park electric cars for several hours while charging, so this policy would appear to deny VAT refunds to countless businesses without such space.

For privately-owned electric cars, charging the vehicle is taxed at the 5% VAT rate as ‘domestic fuel and power’, but only if it is charged up at one’s home. Charging your electric vehicle elsewhere will incur 20% VAT due to HM Revenue & Customs’ policies on the definition of ‘premises’. Not only does this policy appear unlawful in rendering a specific piece of legislation ineffective, but it taxes different classes of citizen differently depending on whether they have a private driveway able to charge their electric vehicle at home. People without driveways or who occupy flats for example, have to charge their electric car elsewhere and will pay 20% VAT instead. Discriminating between different types of owner depending on the property they live in appears politically unsustainable.

Would you like to know more?

If you would like to know more about the tax or VAT aspects of electric cars in your business, please get in touch with your usual Blick Rothenberg contact or Jo (for tax) or Simon (for VAT), whose details you can find on this page.