With electric car and vehicle technology improving and more choice, the tax benefits of electric cars and vehicles are increasing for drivers and business owners alike.

Not only are there tax benefits for electric cars for both individuals and businesses such as capital allowances and benefit in kind (BIK) advantages, savings may also be made in running and servicing costs.

As well as cost savings, electric cars also have huge environmental benefits by producing much lower emissions than traditional cars, creating cleaner and quieter urban areas and making our towns and cities a better place to be for pedestrians and cyclists.

This blog covers the tax incentives on offer when owning or providing electric cars for you, your business, and your employees.

Can I buy an electric car through my business?

If you buy or lease a car out of your own after-tax earnings (your director’s salary or your dividends), you will have already paid tax on those earnings. However, there are clear tax benefits of purchasing or leasing an electric car directly through your business.

Capital allowances benefits for electric vehicles

You can claim capital allowances on cars you buy and use in your business. This means you can deduct part of the value from your profits before you pay tax.

If your business provides a car for an employee or director you can claim capital allowances on the full cost.

Fully electric cars qualify for a 100% first year capital allowance deduction if acquired new.

What counts as a car

For capital allowances a car is a type of vehicle that:

• is suitable for private use – this includes motorhomes
• most people use privately
• was not built for transporting goods

What does not count

Because they do not count as cars you can claim 100% annual investment allowance on:

• motorcycles – apart from those bought before 6 April 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.

There is an increase in corporation tax rates coming from April 2023, meaning tax relief may be available at a higher rate for expenditure after April. For companies with profits normally above £50,000 considering acquiring a car before April, an operating lease rather than purchase may help to defer the majority of the tax deduction, meaning relief at 25% or 26.5% will be available.

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.

Electric car charging points

There are tax advantages if your business installs charging points. A company can currently claim the 130% super-deduction on installation of new qualifying electric charging points.

Vehicle Excise Duty

The road tax, or Vehicle Excise Duty (VED), rates for all pure-electric vehicles have been reduced to £0 until at least 2025. There are reduced VED rates for plug-in hybrid electric vehicles (PHEVs).

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. For 2022/23, fully electric vehicles (zero emission vehicles) are taxed at just 2% of the list price.

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.

The 2022/23 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.

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.

If you want advice on the most tax efficient way to purchase or lease electric cars and vehicles, then contact us now.

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