Tax advantages for electric vehicles

Tax advantages for electric vehicles

With advancements in electric car and vehicle technology, there is a growing array of choices, leading to increased tax advantages for electric vehicle owners, whether they are individuals or business owners. The advantages of owning electric cars extend beyond tax incentives; they encompass benefits such as capital allowances and advantages in terms of benefit in kind (BIK). There are also potential savings in maintenance and operational costs and obviously substantial environmental benefits from the emission of significantly fewer pollutants than traditional vehicles. This blog explores the various tax incentives available to individuals, businesses, and their employees when it comes to electric vehicle ownership and provision.

Is it possible to acquire an electric vehicle through your business?

When you purchase or lease a vehicle using your personal income, you have paid for your vehicle from earnings you have already been taxed on. This can be compared to potential tax advantages from procuring or leasing an electric car directly through your business. By buying or leasing your vehicle through your company at least a portion of the costs of the vehicle can be deducted from your profits before tax is assessed.

Benefits of Capital Allowances for Electric Vehicles

Capital allowances can be applied to vehicles purchased and utilised within your business, enabling you to subtract a portion of their value from your profits before tax is assessed.

If your business supplies a car to an employee or director, you can claim capital allowances for the entire cost.

Until April 2025 (March 2025 for companies), new fully electric cars qualify for a 100% first-year capital allowance deduction.

Defining a "Car" for Capital Allowances

For the purposes of capital allowances, a "car" is a type of vehicle that meets the following criteria:

  • Suitable for private use, including motor homes.
  • Commonly used for personal purposes.
  • Not designed primarily for transporting goods.

What Doesn't Qualify

Certain types of vehicles do not fall under the "car" category, allowing you to claim a 100% annual investment allowance for them. These exceptions include:

  • Motorcycles (except for those acquired before April 6, 2009).
  • Lorries, vans, and trucks.

Leasing an electric vehicle

If the business opts to lease the vehicle instead, this will also benefit from a 100% deduction on the monthly cost of lease payments against profits.

VAT on electric vehicles

Under current law, an electric car is treated the same as other cars for VAT purposes. Therefore, VAT is not recoverable on purchase, unless it can be demonstrated that the car is only available and used solely for business purposes and is not used for private use. In practice this is very difficult to achieve.

The usual VAT recovery rules also apply for car leases, with 50% VAT recovery on the leasing charge available. Full VAT recovery, subject to the usual partial exemption and business use tests, is available on ongoing maintenance of leased cars.

Vehicle Excise Duty

Currently, electric cars don't have to pay a tax called Vehicle Excise Duty (VED). But starting in April 2025, electric car owners will need to pay a tax like regular cars that emit a certain amount of carbon dioxide (CO2). This tax will be higher for the first year and then become a standard yearly payment. In addition to this change, electric cars costing over £40,000 will no longer have an exemption and will face an extra VED cost starting in April 2025. This extra cost currently amounts to £355 for the first five years after the car is registered.

Providing electric cars for employees

Benefit in kind

The percentage of list price of a company car which is taxed as a benefit is determined by the CO2 emissions of the vehicle. Fully electric vehicles (zero emission vehicles) are taxed at just 2% of the list price - with the rate frozen until 2025.

For company vehicles, the benefit-in-kind (“BIK”) appropriate percentages (to multiply by the list price of the car to determine the taxable benefit) for fully electric and ultra-low emission vehicles are very low compared to petrol/diesel cars. This is tax efficient for the employee receiving the car who pays tax on a much lower BIK, and the employer providing it who pays Class 1A national insurance on a lower BIK.

CO2 emissions (grams per km)

Electric mileage range

BIK %

0

2

1 to 50

130 and above

2

1 to 50

70 to 129

5

1 to 50

40 to 69

8

1 to 50

30 to 39

12

1 to 50

less than 30

14

 

These rates are intended to be frozen until 2024/25, and will increase by 1% in 2025/26, a further 1% in 2026/27 and a further 1% in 2027/28 up to a maximum appropriate percentage of 5% for electric cars and 21% for ultra-low emission cars.

Salary sacrifice

Salary sacrifice can be a tax efficient means of providing employees with electric/ultra-low emission cars due to the low benefit-in-kind rates. Cars can be leased and provided to employees in exchange for a reduced salary. The employee saves tax at their marginal rate as the amount of salary sacrificed will be greater than the taxable BIK.

Depending on the salary sacrifice amount, the arrangement may be cost neutral or even cost saving for the employer. Usually, where salary is sacrificed in exchange for a benefit, the employee would be taxed based on the amount of salary foregone under the Optional Remuneration Arrangement rules, but there is an exemption from this treatment for ultra-low emission cars.

Car charging for employees

Where the employer pays for the cost of charging the company-provided electric vehicle there is no taxable fuel benefit for the driver, as electricity is not classified as a fuel for the car or van benefit regulations.

From 6 April 2018, where the company allows employees to charge their own electric vehicles at the workplace, there is no taxable benefit for the provision of that free electricity.

For this tax exemption to apply, the charging facilities must be provided at or near the workplace, which is the same requirement that applies to tax-free workplace parking. This tax exemption does not apply if the employer reimburses the costs of charging the employee’s own vehicle away from the workplace, such as at a motorway service station.

Where the driver of the electric vehicle pays for the electricity to power it, either from their domestic supply or by charging at a roadside station, the employer may reimburse the employee for that cost. With a roadside charge it is easy to see what the total cost is, but it is not so easy to calculate the cost per mile when charging from a domestic supply.

This problem has now been solved, as the employer can pay the company car driver 4p per mile, to reimburse them for the cost of the electricity used for business mileage with no tax implications. This rate only applies to company-owned electric cars, not to private vehicles.

Leased Cars

When an electric car is leased through an operating lease, where it is rented for a set number of years and subsequently returned, the entire monthly rental payment is an allowable expense for tax purposes. If the vehicle is utilized as a company car and has an element of private use, only 50% of the VAT on the monthly rental payment can be reclaimed.

As the government balances the need to reduce the UK's carbon emissions with increasing tax revenues, the incentives available to businesses are expected to undergo periodic review and updates.

Summary

There are many reasons for business owners to consider electric vehicles and purchasing an electric car for themselves through the business or providing employees with electric cars.

The downside of electric vehicles, depending on the types of journeys you undertake, may still be the mileage range on a single battery charge, time needed to charge the car, and finding suitable charging points.

However, there are many benefits including electric cars being better for the environment, lower running costs, lower maintenance because of fewer moving parts and better resale values, and the tax benefits can be substantial.

 

HMRC Link: Claim capital allowances - Business cars

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