Electric dreams – how will your next business vehicles be taxed?
There is a good chance that your next car will be electric. According to the RAC, there are already 239,000 Battery Electric Vehicles driving on the roads of the UK, more than 100,000 of which were registered in 2020, showing the explosive growth in the popularity of electric vehicles.
This rapid growth seems set to continue, with the Government announcing in November 2020 that new petrol and diesel cars will not be sold in the UK from 2030, with new hybrids no longer permitted from 2035.
Experts say we are nearing a “tipping point” for the mass adoption of electric vehicles.
So what does this mean for vehicles owned or used by businesses?
There are many tax benefits to acquiring electric cars via a company.
Usually, company cars do not qualify for full capital allowances. However, for 2021/22, fully electric vehicles (purchased outright or on hire purchase) qualify for 100% first-year allowances (confirmed until April 2025). The car must be purchased as new by the company to qualify for this relief.
If the car is bought second hand, or if the CO2 emissions are between 1 and 50g/km, the capital allowance is 18% of the value of the car each year until the value runs down to zero.
The allowance reduces to 6% for cars with CO2 emissions of more than 50g/km.
|Zero g/km (new and unused)||100% FYA|
|1 – 50g/km||18% WDA|
|More than 50g/km||6% WDA|
In addition to the capital allowances, for a vehicle acquired via a hire purchase agreement, the interest element of the payments will be an allowable deduction for the company.
However, capital allowances are not available for vehicles acquired under a leasing arrangement.
Instead, in the majority of cases, the leasing costs are an allowable deduction for the company, subject to a 15% restriction for cars with CO2 emissions in excess of 50g/km from April 2021.
Businesses can also benefit from the new super-deduction, which offers a 130% first-year allowance on qualifying electric charging points for cars and vans. This will last until 31 March 2023.
The government’s ‘plug-in’ financial grant is designed to encourage and increase the purchase of electric cars in the UK.
The grant, which will be automatically applied by the dealer, is restricted to 35% of the purchase price, capped at £2,500. The car must be brand new, have CO2 emissions of less than 50g/km (with an electric range of at least 70 miles) and must cost less than £35,000 (including delivery fees and VAT).
VAT is not reclaimable unless the vehicle is purchased for exclusive (100%) business use (i.e. by a taxi firm, driving school or a pool car – see below), and so no VAT can be recovered on the purchase of a company car.
However, for leased vehicles that are available for private use, 50% of the VAT on the leasing costs can be recovered.
Benefits in kind
Benefits in kind apply where a driver has a company car available for their own personal use, even if it is just for one day.
The value of the benefit is determined by the list price of the car (including accessories) and its CO2 emissions.
For 2021/22, the benefit on a fully electric company car is calculated at just 1% of the list price. This increases to 2% in 2022/23 (fixed until 2024/25).
The relevant percentage for hybrid vehicles is based on their electric range.
|1-50||More than 130||2||1||2|
|1-50||Less than 30||14||13||14|
The benefit is taxable on the employee at either 20%, 40% or 45%, depending on their level of income. The company would also pay national insurance at 13.8% on the value of the benefit.
When a driver uses a company vehicle for their own personal use, and the company provides private fuel, there also is usually a taxable fuel benefit. However, electricity is not classified as a fuel and so there is no further taxable fuel benefit for the driver of an electric company car.
If the driver pays for the electricity to power it, companies can pay the driver 4p per mile to reimburse them for the cost of the electricity used for business journeys, with no tax implications. This rate only applies to company-owned electric cars where the electricity is paid for privately.
An employer can also install a charging point at the home of an electric company car user with no taxable benefit in kind arising.
A pool car is a company vehicle that’s available for business use by one or more employees of that company. It must be:
- kept at the principal place of business
- not allocated to a specific individual
- not normally kept at an employee’s home
- made available to and used by more than one employee.
- not ordinarily used by one employee to the exclusion of others.
- used only for business journeys – private use is only permitted if it is merely incidental to a business journey (for example, commuting home with the car to allow an early start to a business journey the next morning).
Sole director/employee companies cannot have pool cars as you must have more than one employee available in the pool.
If the vehicle can be classified as pool car, a company can recover the VAT incurred.
To find out more, please contact us today.