As innovation in electric cars has increased over the past few years, so too has the demand for them. Whilst someone may look to purchase a new electric vehicle due to its environmental benefits, it also comes with a host of tax benefits.
Help to buy
Grants are currently available for the purchase of certain government approved low emission vehicles. The grant available for cars is 35% of the purchase price up to a maximum of £2,500. Note that, for cars, the grant is only available for those that cost £35,000 or under. The following requirements must be met to receive the grant:
- Have CO2 emissions of less than 50g/km
- Be able to travel 70 miles (112km) without any emissions
- The vehicle must be brand new and approved by the government
First Year Allowance and Benefit in Kind
Cars with emissions not exceeding 0g/km qualify for a 100% First Year Allowance (FYA). This means that 100% of its cost is deductible from taxable profits by way of capital allowances. For companies, this effectively saves 19% of the cost of the vehicle in tax.
For the employee, a small benefit in kind (BIK) does arise when they are provided with an electric car in the 21/22 tax year. If the emissions are 0g/km, this amount is equal to 1% of the list price of the car.
For example, let’s say a Tesla Model 3 is purchased at £43,000 for an employee where there is no restriction from private use. The BIK received is £43,000 at 1% which equates to £430. Therefore, the tax paid on this (assuming one is in the higher rate tax band) is £172 (40% of £430). Now let’s look at a BMW X4 for the same price of £43,000 with emissions of 167g/km. At that level of emission, the percentage applied is 37%. The BIK received is £43,000 x 0.37 which equates to £15,910. Tax paid on this at 40% leaves the employee with a burden of £6,364 per year – a significant increase over the electric alternative.
Electric charging points
Costs incurred on charging points are also eligible for a 100% FYA when they are installed at the workplace. Where an employee chooses to charge a company electric car at the workplace no benefit-in-kind arises despite how much it is used for private use. Should the car be their own, they still won’t see a liability to their tax bill. This is because electricity does not lay within the meaning of fuel therefore the Fuel Benefit Charge (in ITEPA 2003, s 149) does not apply. Some qualifying conditions exist:
- The charge point must be at or near the workplace.
- Charging must be available to either all of the employer’s employees generally, or all of the employees that are generally at the workplace.
- Charging must be for the battery of a vehicle of which the employee is either the driver or a passenger.
Further, when an employer pays for a charging point to be installed at an employee’s home no taxable benefit is due for said employee if they are using a company car. Should they be using a private car which is also used for business, a taxable benefit does indeed exist based on the cost of the charging point.
Charging the car at home
When an employee charges a car at home where the electricity is supplied by the employer, the ownership of the car must be examined. If it is a company car, no benefit is received. If the car is owned by the employee, the total electricity used will be treated as a benefit in kind despite whether it is for:
A) Private use only
B) Business use only
C) Mixed use.
The employer may choose to instead reimburse an employee for the electricity expense. If the car is company owned and used for business use only, the expense incurs no benefits in kind under section 2889A Self-Assessment exemption. If they use it for private or mixed purposes, they are allowed 4p/mile of reimbursement with no benefit in kind arising.
If the car is private and used for business only or mixed use, the employee is subject to the Approved Mileage Allowance Payment (AMAP) rules of 45p/mile for the first 10,000 miles and 25p/mile for every mile thereafter. Where the car is used only for private use, the costs are taxed as earnings.
As a very slight side note, road tax is also not charged to owners of electric cars.
Should a company choose to instead lease a car, the rules do indeed change. Since leasing is not ownership, it stands to reason that FYA cannot be claimed. However, tax reliefs are available on the VAT incurred.
Where the car is used solely for the purpose of business, all of the VAT incurred can be recovered. If the car is used both privately and for business, 50% of the of the VAT can be recovered.
Personal Contract Purchase
Leasing is offered in a number of ways and one such way that has become more popular is that of the Personal Contract Purchase (PCP). PCPs offer the lessee a choice at the end of the lease period to either hand the vehicle back to the finance company or pay a final amount to take ownership of the vehicle.
The capital allowances treatment will depend on whether the PCPs is a hire purchase agreement or a
lease purchase contract. Under hire purchase, the value of the car is brought into the capital allowances computation at the date the contract starts. For Lease purchase contracts, the lessee is not treated as the owner for the duration of the contract unless the lease would fall to be treated as a finance lease. This is broadly dependent on whether the final purchase price is equivalent to the market value of the car (not a finance lease), if it is capital allowances are not available until such time as the car is purchased.
As PCPs are only available to individuals (i.e. sole traders), an adjustment for private use would be made in the capital allowances calculation. When the owner ceases to be entitled to the benefit of the contract they must bring the disposal value into the capital allowances computation.
Leasing via salary sacrifice
Another way a company can offer an employee a car is via a salary sacrifice. In this instance the employee surrenders a portion of their salary in exchange for the provision of the car. Where the CO2 emissions are below 75g/km the employee is subject to tax on the cash equivalent of the benefit which is set out above.
When a car with emissions over 75g/km is offered, the employee will have to pay the higher of the BIK on the car or the income tax on the amount of salary being sacrificed. Therefore, it can be seen that electric cars have further tax benefits here.
As a slight side note, where the emissions of a car exceed 50 g/km, 15% of the leasing costs are disallowed. It can be seen then that an electric car can claim 100% of the leasing costs as an expense.