Tax and electric vehicles

20th May 2022

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We are often asked by clients whether to switch to electric cars.

So, what are the tax incentives available for zero, or low-emission vehicles?

Salary sacrifice

It is possible to lease an electric car through a salary sacrifice scheme and this can be a good option for clients who are either higher or additional rate taxpayers. The sacrifice element is deducted from gross income before tax and national insurance are deducted, rather than paying for a lease from net income. This can reduce the final income tax rate for clients who are at the lower end of a higher rate band if the salary sacrifice reduces their taxable income into a lower rate bracket. The employer rents an electric car from a supplier and the employee is given the opportunity to rent it from their employer in exchange for part of their salary.

Electric vans

Investing in an electric van can be highly tax efficient for clients, especially if it may also be required for private use. From April 2021, there are no tax implications for using a company owned zero-emission van outside of business hours. These vehicles can also be purchased through salary sacrifice schemes.

Vehicle road tax

A further incentive to investing in an e-vehicle is the road tax payable. The rates for all 100% electric vehicles are now £0 and this will apply until at least 2025. Reduced rates apply to plug-in hybrid electric vehicles (PHEVs), but some road tax is payable depending on emissions.

Capital allowances, super deductions and e-vehicles

To stimulate automotive sales, the government extended first-year capital allowances post April 2021 for purchases of brand new, zero emission electric vehicles and vans. This means that subject to profits being available, 100% of the cost can be claimed in the year of purchase, with no upper restrictions on vehicle value.

A further incentive was introduced in the March 2021 budget with the super-deduction capital allowance. This offers a 130% first-year allowance on expenditure, which includes electric charging points for cars and vans. To qualify, the company must use the charging point in their own business. The super deduction will be available until 31 March 2023.

Electric car charging

If employees can charge electric vehicles at their workplace for no cost, this does not count as a taxable benefit in kind for P11D purposes. The qualifying condition is that the charging facilities are located either on or near workplace premises. Additionally, when an employer pays for the cost of charging company electric vehicles themselves, this falls outside the usual fuel benefit rules and there is no taxable benefit in kind. This applies both if the employer bears the cost directly or reimburses the employee through their expenses.

Claiming expenses for using privately owned electric cars

Employees using private electric vehicles for business journeys are entitled to claim an annual, tax-free mileage allowance of 45p per mile for the first 10,000 miles driven and 25p per mile for any additional miles driven.

From a tax perspective, there has probably never been a better time to invest in electric vehicle. Given that 2030 is the date when new petrol and diesel cars will stop being sold, we can expect more incentives in future.

VAT rules for e-vehicles

Electric vehicles are treated in the same way as any other car for VAT purposes and VAT is not recoverable when a vehicle is purchased. The exception is that the car is only ever available and used for 100% business purposes.

When an electric vehicle is leased, 50% of the VAT paid on the leasing charge can be recovered.

Business owners charging e-vehicles at home

Sole traders or partnerships with an electric vehicle can recover the VAT component on costs for charging electric vehicles at home, provided the electric vehicle is charged for business purposes only. To obtain a VAT rebate, the client needs to keep a mileage record of how much of the cost of charging their electric vehicle is for business versus private use and then normal input tax rules apply.

Employees charging e-vehicles at work

If an employee charges an electric vehicle at a public charging point at their business location, the supply of electricity is made to the company or employer. This means the employer can recover the VAT on the cost of charging the electric vehicle, subject to the normal rules. Detailed mileage records are required to be able to work out how much of the charging costs would be attributed to business versus private use.

Calculating the benefit in kind (BIK) for electric cars

The taxable BIK for a company car is determined by its CO2 emissions, the proportional value of which is included on the employee’s P11D. For 2021-22, zero emission cars are taxed at 1% of the car’s list price when new, plus accessories. This increases to 2% for 2022-23, remaining at this rate for 2023-24.

For low-emission cars with CO2 emissions of 1-50g/km, the relevant percentage is determined by the electric-only mileage range of the car. The electric-only mileage range will determine a taxable percentage of between 2-14%.

Government grants for electric vehicles

The government is offering grants of up to £1,500 towards the cost of eligible electric cars (or £2,500 for wheelchair-accessible vehicles). There is a £2,500 grant for small vans of less than 2,500kg gross vehicle weight and a £5,000 grant for large vans between 2,500kg and 3,500kg gross vehicle weight.

This grant now only applies for electric vehicles that cost less than £32,000 (or £35,000 if wheelchair accessible) and is available at the time of purchase. Recent changes mean grants are no longer available for plug-in hybrid vehicles.

The grants for electric motorcycles and mopeds are £500 off the cost of a motorcycle and £150 for mopeds, with a price cap on vehicles of £10,000.

As you can see there a quite a few things to be considered so if you would like to talk over your options, please call us to help you make the right decision for your business.

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