What are the tax breaks and potential pitfalls of purchasing an electric or hybrid vehicle through your business? Here we consider the general tax implications, given the ever-increasing choice of electric and hybrid vehicles, and the Government’s push for us all to be driving ‘green’.
Business tax allowance on vehicle purchase (capital allowances)
Until 1 April 2021, a low or zero emission car can qualify for a 100 per cent first year allowance (FYA) against taxable business profits, if its CO2 emissions do not exceed 50g/km or the car is fully electric. The cars must be purchased new and unused.
A 100 per cent FYA, against taxable business profits, also applies for zero emission vans, where the vehicle is purchased new and unused before 1 April 2021. A 100 per cent relief was previously available on commercial vehicles, for businesses utilising the annual investment allowance.
For new cars with CO2 emissions of between 51g/km and 110g/km, or used cars with CO2 emissions of less than 110g/km (including used electric cars), there is an allowance of 18 per cent of the written down value, against business profits. Cars with CO2 emissions exceeding 110g/km will only qualify for an allowance against taxable profits at six per cent of the vehicles written down value.
Electric bikes will also qualify for the Annual Investment Allowance, and therefore 100 per cent allowance against taxable profits.
There is currently a plug-in car grant provided by the Government of 35 per cent of the purchase price up to a maximum of £3,000, towards the cost of a plug-in-vehicle. The car must cost a total of less than £50,000 and have an electric range of at least 70 miles. A full list of eligible vehicles can be found on the gov.uk website.
In addition, a grant of up to £350 is available to offset the cost of installing a charger at home.
Personal tax charge for using the vehicle (benefit in kind – BIK)
Assuming an employee or director uses the electric or hybrid car privately, there is a tax charge levied on the individual, through the benefit in kind tax regime.
The tax charge is based on the list price of a company car, at a scale rate percentage determined by the CO2 emissions and electric range of the vehicle.
For 2019-20 low emission cars (up to 50g/km) were taxed at 16 per cent of list price, or 20 per cent for diesels.
From April 2020, HM Revenue & Customs (HMRC) has made significant changes to the car benefit calculation, specifically impacting the benefit in kind charge on low emission cars. For any car with CO2 emissions of less than 50g/km the pure electric range of that car has also been considered, for these cars there are now two determining factors for a benefit in kind calculation.
It can still be beneficial to provide low emission cars to your employees as the benefits charges are considerably lower. The benefit scale rates, as at September 2020, are shown below.
Car fuel benefit charge
In addition to the car benefit charge, a fuel benefit charge may also payable, where the business meets any fuel for private use of the car. However, from 2018 all pure electric cars are exempt from the fuel benefit charge.
Should fossil fuels be used, for example in a plug-in hybrid, the fuel benefit charge will apply.
Personal tax charge for electric vans
Where an employee uses an electric company van for private use there is a benefit in kind which is considered applicable for the use of the van. The electric van benefit for the 2020/21 UK tax year is £2,792 (including an 80 per cent discount over vans being powered by fossil fuels).
Example business tax savings and benefit charges for cars:
*Note: tax savings and charges estimated based on current legislation. All figures are approximate, actuals may vary. The cars above are standard base models. All savings based on outright purchase via cash or HP/finance lease.
National Insurance (NI)
In addition to the benefit in kind tax charge, Class 1A NI is normally payable by the business, providing a vehicle. The class 1A NI rate is currently 13.8 per cent, charged against the taxable benefit each year.
Electric charge points
Where a business installs a charging point before 2023, it can claim a 100 per cent FYA tax allowance for the costs, against its taxable profits. From 2018 there is no taxable benefit charged on employees, who use the charge point owned by the business, subject to other minor conditions.
Reclaiming VAT on a vehicle purchase
As is the case for standard cars, VAT cannot be claimed on electric cars, unless it can be demonstrated that the car is only available solely for business purposes. In the majority of cases therefore, a VAT reclaim is prohibited.
VAT can be reclaimed on electric vans (commercial vehicles), assuming VAT is charged by the dealer. If there is only insignificant private use of the van, 100 per cent of the VAT can generally be reclaimed.
The business tax saving, in the examples above is based on the purchase of a car, by cash, finance lease or hire purchase. Should you be looking to lease a car and pay a monthly rental, please contact us for further advice regarding the tax savings for the business.
The road tax rates for all pure-electric vehicles have been reduced to £0 until at least 2025. There are also reduced rates for plug-in hybrid vehicles.
Please contact our team if you would like to discuss the above, or for further advice by emailing firstname.lastname@example.org
This article is produced as a guide only, Milsted Langdon accept no responsibility to any users of the document. Please contact us for detailed advice, tailored for your business and individual circumstances.
Rates and allowances correct at September 2020.