April 2020 saw new company car tax rates come into effect that resulted in the rate of company car tax available on fully Electric Vehicles reducing from 16% to 0%. This rate increased to 1% in the 2020/21 tax year and then to 2% in the current tax year, a level it will remain at for each of the next 2 tax years, before increasing to 3% in 2025/26. This means that a business can offer EVs to its employees at a lower cost than a petrol or diesel powered equivalent due to the generous tax benefits, resulting in major financial benefits to the employee and the company whilst also helping businesses to reduce their impact on the environment.
As a result of these tax incentives, and a greater choice of models available, it is expected that EVs will be an increasingly common sight on UK roads.
In addition to pledging to reduce emissions as part of the Paris Agreement, the UK has committed to a “net zero” target for greenhouse gasses by 2050. To achieve this, the Government needs to tackle emissions from across the transport industry, which is now the highest emitting sector in the UK. Targeting corporate fleets by offering tax incentives has the potential to displace the amount of fossil-driven miles, making “net-zero” targets more achievable.
1. Capital Allowances
If you purchase a brand new fully electric car through your limited company, you can claim a First Year Allowance of 100%against your corporation tax bill.
This capital allowance can be claimed if the vehicle is purchased outright by the company, or via a hire purchase agreement but not if the vehicle is leased under an agreement whereby the company doesn’t actually own the vehicle.
Something to consider is that when the vehicle is sold, the company will pay corporation tax on any sale proceeds.
Traditionally, cars do not qualify for 100% allowances and instead qualify for a writing-down allowance each year. This is therefore a tax advantage.
Commercial vehicles already qualify for 100% allowances under the Annual Investment Allowance.
In March 2021, the Government announced a new 130% super-deduction for qualifying plant and machinery. Electric cars do not qualify for this super deduction, however, electric vehicle charging points do qualify. The super-deduction is available until 31 March 2023.
2. Corporation Tax and Lease payments
If the vehicle is leased by the Company, the monthly rentals will be included in the profit and loss account as an expense, which reduces the company’s profit and corporation tax for the year.
3. Corporation Tax and Hire Purchase
If the vehicle is purchased via a Hire Purchase (HP) agreement, not only will the company benefit from the 100% first-year allowance but it will also make corporation tax savings on the interest on the monthly payments.
4. VAT
When a company purchases an electric vehicle outright or via HP, in order to reclaim any VAT on the purchase price of the car, it has to be driven for business use only. Commuting from home to a workplace is not considered business use.
If the car is leased, the company can reclaim 50% of the VAT from the lease payments.
5. Benefit-in-kind
As with any company car, if there is any personal usage then a benefit-in-kind will arise. The BIK rate for a fully electric car is currently 2% of the vehicles list price. This is a significant saving on the BIK for petrol and diesel cars which can be up to 37%, depending on their emissions.
Tax and national insurance on benefits-in-kind are payable by the company and/or the employee.
The company will pay:
National Insurance at list price of the car x2% (current BIK rate for electric cars) x 13.8% (Employers national insurance rate).
The employee will pay: List price of the car x 2% (current BIK rate for electric cars) x
employee’s income tax rate.
The installation of a charging point at an employee’s home address associated with the provision of a company car is not considered a benefit-in-kind.
6. Electricity expense
Electricity provided for company car drivers does not count as a benefit in kind if the journey is for business use. Drivers can either pay upfront for home and public charging and reclaim the costs, or the employer can pay for everything and the driver can log private mileage (including commuting) and the costs can be deducted from their salary.
The electricity expense is fully tax deductible for the company.