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18 Jun 2024
As the world intensifies its efforts to combat climate change, electric cars have emerged as a cornerstone of sustainable transport. However, in addition to reducing carbon emissions and dependence on fossil fuels, electric vehicles present a compelling case for savvy consumers and businesses due to the tax incentives that surround their use.
This article will help you to think about the tax advantages and costs of owning and using fully electric cars. Being thoroughly familiar with the way taxes interact on an electric vehicle will help you to advise your clients and assist them to minimise their tax bills.
If you are an accountant in practice or industry and would like more information about becoming a 20:20 Innovation member, why not book a free 30-minute demo with our team today.
Capital allowances apply to both limited companies and unincorporated businesses and there are a number of different types of allowance available. Car purchases are excluded from some of them, so it pays to know which allowance can be used.
If a business buys an asset that qualifies for 100% first year allowances, the full cost of the asset can be deducted from profits in the year of purchase.
Electric cars and the equipment for electric car charging points qualify for 'enhanced capital allowances', which are a type of 100% first year allowance. The cars must be new and unused in order to qualify.
Annual investment allowance also allows the full value of the item purchased to be relieved against profit in the year of purchase.
Most types of plant and machinery can be claimed for, but business cars are specifically excluded. So, no claim can be made under the annual investment allowance for an electric car.
Full expensing is only available to companies. It is available as a relief on company profits for capital expenditure made since 1 April 2023 and it was made permanent in the 2023 Autumn Statement. It increases the relief available for expenditure on plant and machinery in the year that expenditure is incurred.
Unfortunately, cars, including electric cars, are not eligible for relief under full expensing.
You can claim main rate allowances for second hand electric cars and new or second hand hybrid cars with CO2 emissions of 50g/km or less. The main rate allowance allows for a claim of 18% of the car's value, on an annual reducing basis.
If the car has emissions over 50g/km you can only claim special rate allowances. This allows for a deduction of just 6% of the car's value, on an annual reducing basis.
Clearly then, electric cars, which if bought new are eligible for 100% first year allowances, can be well worth considering.
The VAT treatment of electric cars is the same as for all other cars.
As with other cars, electric cars are sold with 20% VAT added to the net sale price. A business can only reclaim this VAT if the car is 100% for business use. It is very rare, even for a car that is heavily used for business purposes, to be 100% for business use.
If the electric car is leased, then 50% of the VAT on the lease costs can be claimed, the same as would be the case for any other car.
The VAT rate paid on the electricity costs to charge an electric car will depend on the location where it is charged.
If the car is charged at home where the electricity supply is on a domestic tariff, then the VAT rate will be 5%.
If the car is charged at a public charging point or at a business premises that has its own charging facilities, the electricity supply is likely to be on a business tariff and so the VAT rate will be 20%.
The rules on reclaiming VAT incurred on charging electric vehicles vary according to where the vehicle is charged.
Where a sole proprietor charges their vehicle at home then they can recover the VAT.
If an employer reimburses an employee for charging their vehicle at the employee's home, then the employer cannot recover the VAT. This is because the supply of electricity was made in the employee's name and not the employer's.
This is a controversial point because it is inconsistent with what happens if an employer reimburses petrol or diesel using the mileage allowance payment rates approved by HM Revenue and Customs. In this case, the employer is allowed to claim back the VAT element of the mileage rate.
Where an employee charges their vehicle at the business premises, then the employer can recover the business use proportion of the VAT amount.
Currently, electric cars do not attract vehicle excise duty, also known as road tax, car tax or vehicle tax. This is a clear advantage over petrol and diesel cars.
However, the government is planning to begin introducing road tax for electric cars from 1 April 2025. Electric cars registered from April 2025 will pay road tax for the first year based on the lowest rate available. This is currently £10.
In the second year, the standard road tax rate will be payable. This is currently £180.
Therefore, while there is currently no road tax to pay for an electric car, this looks set to change from April 2025.
The running costs for fully electric vehicles owned by a business can be deducted from pre tax profits in the same way as for petrol or diesel cars. Therefore, if the business pays the road tax and servicing costs on electric company cars this can reduce taxable profits.
The tax implications of paying for charging an employee's fully electric vehicle is discussed below. However, it is worth noting that charging costs are lower than the fuel costs of petrol or diesel cars, which include fuel duty.
Congestion charges now apply for driving in a 'clean air zone' or 'low emission zone' in some UK cities. A daily congestion charge can quickly mount up. Electric vehicles, however, do not need to pay a congestion charge in those areas and this is a clear advantage over other vehicles.
For a number of years the government have offered a plug-in car grant that makes it cheaper to purchase electric vehicles. Electric cars are now excluded, but other types of electric vehicle are currently still eligible. There is no need for the purchaser to apply for the grant as it is provided to the seller, who includes it as a discount in the purchase price.
A Workplace Charging Scheme grant is also available for companies that can help with covering the costs of installing chargers if all the criteria are met.
Company cars are a popular way to reward staff, with many of the electric vehicle drivers on UK roads driving a company car.
Providing a car to an employee will result in a benefit in kind being assessed. Based on the taxable value of the benefit, an employee will pay income tax and the employer will pay class 1A national insurance contributions. Comparing the taxable benefit amounts, the company car tax on fully electric vehicles is markedly less than for comparable petrol and diesel cars.
Company car tax is calculated based on several factors, including the car's list price, its CO2 emissions, the fuel type and whether or not the car is used personally.
The taxable value is generally based on the manufacturer's published list price for the vehicle, plus any optional extras, multiplied by a percentage. This applies whether the car has been purchased by the employer or is being leased.
The percentages are set by HM Revenue and Customs, and are based on a vehicle's CO2 emissions and, in the case of hybrid cars, their electric range. A car's electric range is the amount of miles it can cover on a single charge. Generally, cars with lower CO2 emissions and, if applicable, higher electric ranges, are subject to lower percentages.
For the 2023/24 and 2024/25 tax years, the percentage that would apply to an electric company car would be 2%.
Using this percentage as an example, the taxable value for each tax year of an electric company car with a list price of £35,000 would be £700 (£35,000 x 2%). In contrast the taxable value for a conventional petrol car with CO2 emissions of 55 and the same list price would be £5,600 (£35,000 x 16%)!
The government has announced plans to increase the percentage rates for electric and zero emission cars by 1% a year so that by 2027/28 the percentage rate will be 5%.
As company car drivers switch to fully electric cars, and the use of petrol and diesel cars dwindles, it seems likely that the percentage rates for zero emission vehicles will continue to rise.
A car fuel benefit will usually apply where the employer pays for private fuel used by a company car employee. However, where an employer directly pays to charge an electric vehicle then there is no car fuel benefit, regardless of the employee's private use of the car.
If, however, the employee pays for the electricity themself and the employer reimburses them, then this is not the case. In this situation if the employee does any private mileage, which includes commuting, then the amount the employer pays must be treated as earnings with PAYE and national insurance contributions deducted via payroll. The employee may be in a position to make a claim for their business mileage.
The situation further complicates if the employer pays to charge an electric car that is owned by the employee.
If the employer pays to charge the employee's car using a chargepoint that is at or near the business's workplace, then there is no benefit, or tax or national insurance to report or pay.
Where the employer pays to charge the car in another way, then the cost of the electricity has to be declared as a benefit. The employee would be able claim a tax deduction for their business mileage.
Finally, if the employer reimburses the employee for charging their own car, then unless they reimburse only the business mileage using an approved mileage rate, the reimbursement is counted as earnings and has to have PAYE and national insurance deducted via payroll.
A van benefit usually arises when an employer provides an employee with a company van that is used for personal journeys.
Currently though, there is no van benefit for zero emission vans. These still need to be reported on the P11D form, but the benefit value is £0.
As with cars, there is no van fuel benefit where the employer pays to charge the van with a workplace charger.
Many employers will reimburse the business mileage driven by their employees. Provided the mileage rate is no more than the approved rates provided by HMRC then there is no income tax or employers class 1A national insurance payable on those payments to the employee.
Employees who are electric vehicle owners can be reimbursed at HMRC's approved mileage rates. These are currently 45p per mile for the first 10,000 business miles driven in a tax year. Each business mile over 10,000 miles can be reimbursed at 25p per mile.
Employees with a company electric car can be reimbursed at HMRC's advisory fuel rates. These rates are updated quarterly on the quarter dates 1 March, 1 June, 1 September, and 1 December.
If an employer does not reimburse an employee for business mileage driven in their own or a company vehicle, then the employee has the opportunity to claim a tax deduction for the mileage.
Clearly, there are tax benefits that come with electric vehicles for both businesses and their employees. In pursuit of environmental objectives, the government have used tax incentives to promote the use of electric vehicles. As takeup increases over the next few years, these incentives are likely to lessen or change.
It is important then to stay up-to-date to ensure that you can always give your clients the best advice on this subject. As a 2020 member you will have access to training and updates on all areas of tax, including those areas that relate to electric cars.
If you would like more information about joining 20:20 Innovation why not book a free 30-minute demo with our team today or call us on +44 (0) 121 314 2020.
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