Overview

We get asked a lot whether our clients should have company cars and over recent years you will have heard us say No! Due to how heavily they are taxed.

A company car is treated as a benefit in kind for tax purposes, the tax is calculated based on the CO2 emissions and the list price of the vehicle regardless of whether you buy the car new, second hand or how much you pay for it.

However, as 100% electric cars have now become more popular, the tax legislation changed in April 2020 therefore it could be time to consider if an electric vehicle is right for your business.

Tax implications for the company? – The Car

Any brand-new electric vehicles are deemed to get full company corporation tax relief. There are two ways to have an electric car through the company:

• Purchase it through the company outright: under this route, in the first year you will get 100% first capital allowances on the vehicle, so if the vehicle costs you £100,000 you would get at least £19,000 tax relief (up to 25% relief from April 2023). This is still the case if you purchase the vehicle using HP finance if you have a delivery note that proves the vehicle was delivered before the year end date..
• Lease the vehicle: under this route you get corporation tax relief on the rental payments, as and when they are paid, plus you can claim back 50% of the VAT on each payment.

Tax implications for the company? – Charging points

The installation of electric charging points at the company premises or home of an employee benefits from the 130% super deduction rate of capital allowances up to 31 March 2023. After that date the expenditure is likely to be treated like any other capital expenditure i.e., subject to the Annual Investment Allowance (AIA) limit (currently £1,000,000) unless the Government extends the 100% first year allowance to 2025 (as envisaged) in which case it won’t affect the AIA limit which may reduce back down to £200,000 from 1 April 2023.

Advisory fuel rates for employees’ own electric vehicles?

Advisory fuel rates for employees’ electric vehicles used for business use rose from 5p per mile to 8p per mile on 1 December 2022. These fuel rates can be used to reimburse employee business mileage without tax or NIC consequence.

What are the tax implications for the individual?

From April 2022 electric cars attract a Benefit in Kind of 2% on the list price, so on a vehicle with a list price of £100,000 a basic rate taxpayer would pay £400 tax per year, whilst a higher rate taxpayer would pay £800 tax. The benefit in kind would be £2,000 so the company would be liable for Class 1A NI of £276. The 2% rate is frozen until 2025.

From April 2025 this rate is set to increase by 1% per year up to a maximum of 5% by tax year 2027/28. Additionally, Vehicle excise duty on electric vehicles is set to increase from April 2025.

The employee is also able to claim mileage on electric cars at a rate of 5p per mile (8p per mile from 1 December 2022) if it is a company car.

The installation of an electric charging point at an employees’ premises for use in their company vehicle is tax free whereas for a personal vehicle this would constitute a benefit in kind. All employees can make use of charging points at or near company premises free of tax.

For a privately owned car, employees can claim back 45p a mile for the first 10,000 miles and 25p thereafter in the same way as users of non-electric vehicles.

Vans

For Vans the 130% Super Deduction rate of capital allowances can be claimed until 31 March 2023 after which the 100% first year allowance for zero emission vehicles can be claimed as above for cars.

From 6 April 2021 electric vans can be provided without any Benefit in Kind on the employee. Similar considerations apply in relation to charging points and fuel provision.

Salary Sacrifice

Salary sacrifice may be a way to gain savings for both you and your employee. Sacrificing salary for a taxable benefit means that the employee still pays tax on the benefit but given that this is extremely low in the case of an electric vehicle this may be a way of providing a flexible salary package where the employee is not otherwise entitled to a company car and is a cheaper option than them buying for themselves. These types of packages can be via PCP and therefore cars can be provided fully maintained and insured.

Practical considerations

It may sound simple but only get an electric car if it is right for you and the relevant employee. There are other ways to save tax on providing vehicles, you don’t need to let the tax tail wag the dog!

If you are considering purchasing an electric car then you may want to consider the resale value, as 40% of the UK population live in a terraced house and it is believed there isn’t a solution for charging points. As cars are already a depreciating asset this may mean that any resale is further restricted and could drive down the price.

These are the tax rules for 100% electric cars please bear in mind these rules are not the same for hybrid cars, please contact our tax team to discuss the implications on Hybrid vehicles.