Related Contacts
Marcus Worthington Partner
View Profile
1st September 2022
With the urgency of the climate change crisis growing every day, the UK government has put in place ambitious targets to reach net zero emissions by 2050. This includes a ban on the sale of new petrol and diesel cars from 2030.
In order to smooth the transition and encourage the purchase of more electric vehicles ahead of this date, the government introduced a number of generous tax incentives in April 2020 for businesses purchasing new, fully electric cars.
As of April 2021, any business (whether a limited company, sole trader or partnership) purchasing a new electric vehicle (or one that produces no carbon emissions) is eligible to claim capital allowances at a preferential rate. This is also known as ‘enhanced capital allowances’, a type of first year allowances that allows you to deduct 100% of the cost of the vehicle from your profits before tax.
In comparison, older cars that produce more C02 are only eligible for main rate allowances (18% of the car’s value) or special rate allowances (6% of the car’s value), depending on their age and carbon emission levels. You can check your eligibility for capital allowances on business cars on the government website.
Sole traders or partnerships can claim capital allowances in the same way, but the amount they can claim is governed by how much time they use the car for business compared with private use. This is called the private-use adjustment.
This enhanced capital allowances makes purchasing an electric vehicle much more lucrative for businesses, as can be seen in the example below:
A business purchases a brand new electric car in 2022 for £40,000, rendering it eligible for enhanced capital allowances. This means that the business is able to deduct the full £40,000 from its profits in the year of purchase.
Another business purchases a second-hand petrol car in the same year, for the same price, with carbon emissions of 45g/km. This car is only eligible for main rate allowances, meaning the business can only deduct 18% of the cost of the car from profits before tax. The business must therefore pay Corporation Tax on the remaining £32,800 at a rate of 19%, totalling £6,232.
Now let’s say a sole trader purchases a fully electric vehicle for £40,000, but only uses it for business purposes 60% of the time. The vehicle would be eligible for enhanced capital allowances, but the sole trader would only be able to claim 60% of the car’s value due to the private-use adjustment, because she uses the car privately 40% of the time. Therefore, she can deduct £24,000 from her profits on the year of purchase and will pay Corporation Tax of £3,040 on the remaining £16,000.
Employees using electric company cars also stand to save significant sums in tax on benefits in kind (BIK). BIK is a tax that employees pay on company benefits that aren’t included in their salary, such as vehicles, private health insurance and other ‘perks’. It is chargeable on company cars that are used by employees for both business and pleasure.
BIK tax is calculated by multiplying the P11D value of the car (i.e., the list price excluding the first year registration fee and vehicle tax) by the BIK rate, and then multiplying that figure by the employee’s marginal rate of income tax. The BIK rate for fully electric cars with an electric range of over 130 miles is just 2% for the 2022/23 tax year, compared with up to 37% for high-emission cars. You can view 2022/23 BIK rates for company vehicles on the government website.
Taking the above example, an employee paying 40% income tax, whose business purchased a fully electric company car with a P11D value of £40,000, would pay £320 in BIK (£40,000 x 0.002 x 0.4). Conversely, another higher-rate taxpayer whose company bought a car attracting the maximum BIK rate would pay £5,920.
The tax treatment of purchasing an electric vehicle depends on how you buy it. Purchasing a vehicle outright through a business, as we have seen, allows the business to deduct the full cost of the vehicle from profits before tax.
If the business enters into a hire purchase agreement to obtain the vehicle, they can claim capital allowances at the relevant rate in a similar way to if they had purchased the vehicle outright. Any interest paid on the loan, however, will be treated as a tax-deductible business expense.
Some limited companies may choose to lease business vehicles instead. With electric vehicle technology improving all the time, this approach could protect businesses from technological obsolescence just a few years down the line. While not eligible for capital allowances, the costs of leasing a fully electric vehicle, or one with emissions of 50g/km or lower, are treated as fully tax-deductible business expenses, meaning you can deduct the full annual cost from profits before tax. Secondly, even if a car is not used 100% for business purposes (which very few are), VAT-registered businesses can also claim back 50% of the VAT paid on the vehicle.
Under current UK law, the electricity used to charge a fully electric car is not considered as fuel. As a result, electric company cars do not qualify for normal fuel benefit rules under section 149 of the Income Tax (Earnings & Pensions) (ITEPA) Act 2003. Essentially, this means that employees using charging points at work do not have to pay BIK; it also makes reimbursing employees who pay to charge the vehicle (i.e., at their own address or a public charging point) more complicated, as employers cannot do so using advisory fuel rates (AFRs). By contrast, petrol, diesel, plug-in and hybrid vehicles are all subject to normal fuel benefit and AFR rules.
Due to this quirk in the rules, an employer could also pay for an electric charging point to be installed in an employee’s home without this incurring BIK (this is only for business cars; if an employer pays for an employee to install a charging point for their personal electric car this will be treated as a taxable benefit).
The tax treatment of reimbursing business mileage for fully electric cars again depends on the ratio of business to personal use. Where the car is used for business only, the expense can be reimbursed under section 289A of ITEPA (i.e., it will not be subject to income tax or national insurance). Employees who use their cars for private or mixed use will be subject to income tax and national insurance on reimbursements, but will then be entitled to a deduction for the electricity cost of any business miles travelled.
We hope that this brief overview has given you a better understanding of the tax benefits of purchasing new, fully electric vehicles through your business. For further information or to discuss the contents of this article, please do get in touch.
