Service: Taxation 

Tax on company cars: why you should go electric

By Colin Burns

20 Apr 2021

Petrol has peaked, as half of drivers are considering switching to a fully electric car!

Updated 15 March 2022

The Tax Position Relating to Fully Electric Company Cars

The government aims to cease the sale of petrol and diesel cars by 2030. The switch away from petrol and diesel vehicles is gathering pace. The sales of electric cars have now overtaken diesel, being one in every five new vehicles sold.

The government has proposals to require manufacturers to sell a certain percentage of zero-emission vehicles from 2024, in order to reach net-zero carbon emissions.

The tax position of an employee with a fully electric company car is exceptionally generous!

 From 2020/21 the benefit in kind was reduced to nil.

This was an amazing tax-free perk, but it was for one year only...

Year Taxable Benefit
2020/2021 Nil (previous tax year)
2021/2022

1% (current tax year)

2022/2023, 2023/2024, 
2024/2025

2% (next 3 tax years)

 

Accordingly, the taxable benefit currently is 1% x the list price. Employees with fully electric company cars will be taxed on the 2022/23 benefit in kind rates of 2% for 2023/24 and 2024/25.

An example: 

Darren has an advertising business, he is a director of the company. The business recently bought Darren a new fully electric company car. They bought the Audi Q4 e-tron. He loves it! Its list price is £40,000.

It is fully electric and capable of fast charging in 38 minutes. Its range is 317 miles.

The company got 100% capital allowances on the purchase, and for the previous fiscal year, 2020/21, there was no taxable benefit in kind whatsoever on Darren. There was also no employer’s Class 1A NIC to pay on the zero benefits in kind! For the tax year, 2021/22, he will be taxed on 1% of the list price i.e. £400, and in 2022/23 just 2% (see table above).

This is still a very low taxable benefit in kind. If he is a 40% taxpayer, he will only pay a tax of £160 for 2021/22 and £320 for 2022/23. This covers unlimited private use, his private insurance, and also any repairs needed to the vehicle. This is a very attractive tax planning perk.

The list price must include the cost of the battery even if it is leased separately. HMRC’s view (quite understandably) is that the car cannot move without its battery. It is integral to the car.

Salary Sacrifice

If an employee has a company car provided by their employer for them under salary sacrifice, the taxable benefit is the higher of the amount of the salary given up or the taxable car benefit.

However, the salary sacrifice anti-avoidance legislation does not apply if the company car has CO2 emissions of less than 75g/km.

It is, therefore, possible for an employer to provide fully electric and certain hybrid company cars, pursuant to a salary sacrifice arrangement, and for the employee to retain the tax benefits.

Many employees are now agreeing to a salary sacrifice, in exchange for a fully electric company car. This will produce a big tax and NIC saving for the employee.

The term “Company Car” is very familiar, but perhaps not a good phrase. It should be “Employer-Provided Car”. The employer need not be a company. The same tax benefits legislation applies if the employer is a Sole Trader, Partnership, or LLP Government Grants.

The government’s “plugin” car grant has been reduced from £2,500 to £1,500 from 15 December 2021.

The car must have a recommended retail price (RRP) of less than £32,000 (including VAT). The grant will pay for 35% of the purchase price of the vehicle up to a maximum of £1,500.

VAT on the electric car cost

Recovering VAT on ‘business cars’ - the key six questions to ask yourself:

  1.  Is the car incapable of private use?
  2. What is your trade or business, what role will the car play and how will it be used in that business?
  3. Have the directors and employees been instructed that they are never allowed to use the car privately?
  4. On the days and evenings, when the car is not used for business purposes, where will it be kept?
  5. Where are the keys to the car kept?
  6. Will a mileage log be completed for each use?

Electric Charging Points and Charging Costs

If a business installs, at their workplace, charging points for electric vehicles, they can claim 100% Capital Allowances for these costs and hence claim tax relief in the period the expenditure occurs.

If an employer allows its employees to charge up their own electric cars each day at the workplace, there is no taxable benefit in kind. This is a very good tax-free perk! The tax legislation does not treat electricity as fuel. The S.149 ITEPA 2003 fuel benefit charge does not apply to electricity supplied by an employer. Accordingly, no taxable benefit in kind will arise if an employer pays to charge an electric company car (owned by an employee) at the workplace, irrespective of the level of the employee’s private mileage.

The following conditions must be met, in order for the exemption to apply:

  1. The charging facilities must be provided by the employer, at or near the employee’s workplace. 
  2. The electric charging must be available to all the employer’s employees generally, or all the employer’s employees generally at the employee’s workplace.
  3. The charging facilities must be for the battery of a vehicle in which the employee is either the driver or a passenger.

An example:  

Harry and his neighbour David work for different employers very near one another. They both have their own fully electric cars. Harry drives them to work in his car from Monday to Wednesday. David drives them in, using his car on Thursday and Friday.

Harry’s employer spends £5,000 to install electric charging points in their office car park. David’s employer does not provide charging points at his workplace. The appropriate car is parked each day at Harry’s office car park.

When Harry charges up his own car at his office car park, the benefit is exempt. Likewise, when David charges his own car up at Harry’s office car park, the benefit also remains exempt, as Harry is a passenger.

However, if the employer pays for the electric charging up, for an employee’s own electric car, away from the workplace, then this exemption will not apply.

Charging point installed at an employee’s home 

Example One 

X Ltd employs Eric. It provides him with a fully electric company car, the Nissan Leaf.

X Ltd also pays for a charging point at his home, which costs the company £500

The fitting of the charging point, in the circumstances illustrated in the above example, will not give rise to a benefit in kind.

There is no taxable benefit. S.149(4) ITEPA 2003 extends the exclusion from the car fuel charge to any ‘facility or means for supplying electric energy’. Accordingly, the benefit in kind charge does not apply.

Additionally, S.239(4) ITEPA 2003 specifically excludes a benefit connected with a taxable car.

X Ltd can therefore provide a vehicle charging point at Eric’s home, in conjunction with his company car, without a taxable benefit in kind arising.

Example Two

Another employee of X Ltd, Toby, drives his own fully electric car, a Ford Focus Electric.

X Ltd provides an electric charging point at his home, also costing £500. This is not provided in conjunction with the provision of a company car.

Accordingly, this would result in an annual taxable benefit in kind, which would be 20% of its market value, namely £100 (£500 x 20%) for each year of use.

If the charging point, say three years later is transferred to Toby, for him to own, careful consideration of the tax position is needed.

A taxable benefit would result, by virtue of S.206(3) ITEPA 2003.

If the ownership of an asset is transferred to an employee, in these circumstances, then he is charged to tax at that time, on the higher of:

a)    The market value of the asset at the time of the transfer of ownership (say £50).
b)    The market value at the time of the original provision, less the total amounts charged on any employee as a BIK for the use of the asset.

Illustration...
                    £
                   500
Less           300 (£100 x 3 years)
                  £200  
The taxable benefit on Toby will be £200.

The Company Charging Up the Electric Vehicles 

An example

X Ltd pays for an electric charge card for Eric costing £150 to allow Eric unlimited access to local authority vehicle charging points.

No taxable benefit would arise on Eric because of S.202(1) ITEPA 2003 and S.239(4) ITEPA 2003.

However, if the same facility had been provided to Toby for his own electric car, his taxable benefit would have been £150.

Charging the electric cars: the benefits in kind position - Summary

Provision Company car made available 
for private use
Employee’s own car used for business

Employer allows cars to be charged up from a vehicle charging point at work

There is no taxable benefit

Generally, no taxable benefit arises. However, various conditions apply.

Employer pays for a vehicle
charging point installed at 
the employee’s home
There is no taxable benefit There will be a taxable benefit based on 20% of the cost to the employer.
Employer pays for charge card to allow individuals unlimited access to third 
party charging points
There is no taxable benefit There will be a taxable benefit based on cost to the employer.

 

Further comments on electric vehicles 

Electric vehicles are the future!

By 2026, electric vehicles are expected to account for a fifth of all vehicle sales.

Additionally, the ban on the sale of new petrol and diesel cars has been advanced to 2030.

Capital Allowances 

If a business buys a brand new and unused electric company car, they will get a 100% tax deduction. Second hand electric cars go in the main 18% plant pool so attract a profits deduction of 18% of cost on a reducing balance basis.

Super-Deduction of 130% (from 1/4/2021 to 31/3/2023)

The Super Deduction is not available to electric cars. But it does apply to commercial electric vans, lorries and charging points.

VAT on charging points 

VAT incurred on charging points supplied to the business (at their premises) can be recovered.

However, if the business pays for the installation of a charging point at the employee’s home, then the VAT cannot be recovered as the charging point has been supplied to the employee.

Electric Vans

Electric vans are becoming very popular with directors and employees.

From 6 April 2021 onwards, there is a zero-van benefit charge for employees who drive fully electric vans and use them privately. So, the tax on this electric vehicle is reducing permanently downwards to nil!

Is it a car or is it a van?

Let us consider an example of a Nissan e-NV200 fully electric van.

X Ltd allows its director, Terry, to use it to get to and from work. He uses it all day at work for business purposes. X Ltd also allows Terry to use it privately both in the evenings and weekends. Terry is a 40% income taxpayer.

X Ltd have treated the Nissan e-NV200 vehicle as an electric van for benefit in kind purposes.

However, HMRC have claimed and argued that it is an electric car. HMRC feel that it is not a goods vehicle. They have referred to the legislation in S.115 ITEPA 2003, which states:

(1) In this Chapter—

“car” means a mechanically propelled road vehicle which is not:

a)    a goods vehicle,
b)    a motorcycle,
c)    an invalid carriage, or
d)    a vehicle of a type not commonly used as a private vehicle and unsuitable to be so used

“van” means a mechanically propelled road vehicle which:

(a)    is a goods vehicle, and
(b)    has a design weight not exceeding 3,500 kilograms, and which is not a motorcycle. 

(2) For the purposes of subsection (1)
 “goods vehicle” means a vehicle of a construction primarily suited for the conveyance of goods or burden of any description;

HMRC have stated:

The Nissan e-NV200 is a multipurpose vehicle. Indeed, Nissan’s own brochure describes it as a people carrier. It is equally suitable for carrying goods or passengers. It is not a goods vehicle. For the purposes of the tax legislation, for BIK purposes, it is a car.

Capital Allowances (‘FYA’) for the fully electric and low emission company cars 

 

2020/21

0-50g/km 100% FYA
51g-110g/km 18%
Exceeding 110g/km 6%

 

2021/22

Zero g/km 100% FYA
1-50g/km 18%
Exceeding 50g/km 6%

 

To qualify for the 100% FYA, the car must be purchased new and unused.

It is worth noting that from the current year, 2021/22 onwards, the purchase of hybrid cars will not qualify for a 100% FYA. Indeed, the majority now, will only get 6% p.a capital allowances on a reducing balance basis during ownership, because their emissions exceed 50g/km

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