VAT and electric vehicles

At present, the UK Government’s approach to VAT for electric vehicles (EVs) is a mess. The current law and policies on VAT:

• discriminate against EVs in favour of petrol and diesel cars contrary to the green agenda.
• discriminate in favour of individuals with driveways who can install a charging point and against individuals who live in flats or houses with no driveways. This discrimination in particular seems politically unsustainable.
• deny VAT-registered businesses legitimate refunds of VAT for charging EVs when used for business purposes.
• are not in line with the Government’s own existing policies for the taxation of Benefits in Kind.

In conjunction with actions being taken by many countries around the world, the focus for Governments is on overtly green policies to both favour the environment and assist in the fight against Climate Change.

One such area is the drive for increasing adoption of EVs to reduce the emissions from petrol and diesel vehicles. The development of electric cars is progressing rapidly as are trials of increasingly more practical electric commercial vehicles.

In the UK however, current VAT policies for electric cars not only contradict the Government’s green agenda by directly favouring petrol and diesel cars but are barely even ‘greenish’. With the UK having left the EU, our domestic VAT policies can now be amended to suit our own domestic agenda. In our view, the Government has missed a huge opportunity to lay down the tax gauntlet to other countries in advance of the COP26 summit.

The VAT rate applied to EVs

UK VAT legislation already applies a 5% VAT rate for ‘domestic fuel and power’ which is defined as either fuel and power supplied in one’s home or, for electricity, supplies of less than 1,000 kw per month at any premises. Two quite separate legal provisions.

We make no comment on the political decision whether to retain the 5% VAT rate or remove VAT entirely on domestic electricity, but in their published policy for EV charging, HMRC have conflated these two quite separate legal provisions into one single, arguably unlawful, test and also denied that EV charging points are ‘premises’ at all, even when sited at hotels, shopping centres, car parks and filling stations, etc. The consequence is that power bought for EVs is charged at the 20% VAT rate everywhere except at one’s private home.

For private owners of EVs this makes no logical sense at all since domestic use is domestic use irrespective of where the EV is charged. It is also clear that HMRC’s published policy discriminates against EV owners who live in flats or who have no driveway access and directly favours those owners who live in houses with driveways and are able to charge their EV at home. This is directly penalising owners who do not have driveways at home and will have to charge their EV elsewhere and pay a higher VAT cost.

It is for Government lawyers to justify but, from a legal standpoint, HMRC’s policy to conflate two separate and unrelated legal provisions into a single combined policy, appears to run contrary to the legislation and is arguably unlawful, not least because it renders a specific piece of legislation introduced by Parliament (the 1,000kw test) completely redundant when applied to EV charging.

VAT refunds for businesses

The VAT rules for petrol and diesel cars allow VAT-registered businesses to claim refunds of VAT on fuel costs for business use, irrespective of where the employee fills up. HMRC’s published policy for EVs however, is that businesses can only claim refunds of VAT on EV charging if the EV is charged up at a charging point on the business premises (and not when charged from home).

Not only is there no such restriction in VAT law, but, again, this policy makes no logical sense since fuel is fuel irrespective of where the employee ‘fills-up’ and, if it is used for business purposes, the VAT-registered business should be entitled to a refund of the VAT. This again appears to be a discriminatory policy, this time against businesses who do not have suitable ‘premises’ to enable the parking of EVs whilst charging, not least that many EVs owned by or allocated to specific employees may not be kept on the business premises at all. HMRC’s policy unfairly and, again, arguably unlawfully, denies such businesses VAT refunds that they are legitimately entitled to.

Fleet EVs

When a business purchases a normal petrol or diesel car that is intended for both business and private use, as most are, it cannot claim back any of the VAT on the purchase cost. For hire cars however, current VAT policy does allow a proportion of VAT refunds on the hire cost.

Since the UK left the European Union and is now able to adapt its own VAT policy to suit our own growing economy and green agenda, the opportunity is there for the Government to change VAT legislation to encourage business fleets to switch to EVs by allowing VAT refunds on the purchase cost. The risk of the cars being used for private purposes could easily be dealt with by a variety of existing VAT mechanisms to facilitate a VAT charge on any private use.

In what appears to be a serious omission, the Government has to date declined to take up this opportunity to adapt VAT policy to encourage the take up of EVs by company fleets.

Employees

There are already favourable tax policies that do not treat the provision of EV charging facilities as a Benefit in Kind for Income Tax.  For company EVs, the electricity is also not treated as ‘fuel’, so no fuel benefit charge arises either.

These tax policies are welcomed and will assist in encouraging the take-up of EVs, but their impact is diluted by discriminatory VAT policies that directly contradict useful tax measures elsewhere.

Recommendations

We believe that the Government and HMRC should apply joined up thinking on the use of tax policy to encourage the use of EVs. In particular, we recommend:

• Reclassifying EV charging points as ‘premises’ (not least that many are in actual premises anyway despite HMRC’s denials to the contrary) so that:
• existing VAT legislation can be applied and most EV charging will qualify for the 5% VAT rate.
• EV owners who live in flats or who do not have driveways are not unfairly discriminated against.
• Allowing VAT registered businesses to claim legitimate refunds of VAT costs on charging EVs used for business purposes irrespective of where the charging takes place.
• Consider phasing out the ability to claim VAT refunds on the cost of petrol and diesel by reducing the proportion of VAT that can be reclaimed down to zero, over say five years.
• Consider allowing VAT-registered businesses to claim refunds of VAT on buying or hiring EVs and adapt and apply existing VAT measures to tax private use of business vehicles.
• Aligning VAT policies with other tax policies to overtly encourage the take-up of EVs and the switching from petrol and diesel-powered vehicles.

Contact us

If you would like to discuss any of the above please contact your usual Blick Rothenberg contact or Simon Newark, using the details on this page.

You can also visit our COP26 Hub where we will share an article written by our experts each day the COP26 conference takes place with a focus on green taxation.