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24 March 2021

Tax & Electric Vehicles – What you need to know

Frequently Asked Business Question:

I operate a small owner-managed company and my lease is up for renewal on my diesel company car. I am considering having the company replace my car with an electric car but I would like to understand the tax benefits?

Top Tip:

The next few years will see a transport revolution as the UK Government seeks to deliver on its commitment to phase out the sale of new petrol and diesel cars from 2035. I set out below some of the key tax incentives for a company looking to purchase an electric car for use by a director or employee, highlighting some of the changes due to come into effect later this year.

An electric car is a car that runs on electricity at least some of the time. The main types of electric vehicle are:

  • the all-electric vehicle (AEV). In this case, the car’s battery is its only power source and it is recharged by plugging it into the grid via a charge point. An AEV has zero direct (tailpipe) CO2emissions;
  • the plug-in hybrid electric vehicle (PHEV). This is a car that switches between running on electricity and fossil fuels. As with the AEV, the battery is recharged by plugging it into the grid.
  • the hybrid electric vehicle (HEV). Here, the battery can only be recharged while driving. Typically, HEVs can drive in battery mode for only a few miles.

In general terms, tax incentives are restricted to AEVs and to a lesser extent, PHEVs.

For expenditure incurred before 1 April 2021, a 100% First Year Allowance (FYA) is available for a new car which is an ‘electrically-propelled’ car or which has low C02 emissions. An ‘electrically-propelled’ car is a car that is propelled solely by electric power (i.e. it is an AEV). A car has low CO2 emissions where the emissions do not exceed 50 g/km (typically, a PHEV).

Cars that do not qualify for a FYA are allocated to a pool by reference to an emissions threshold. The emissions threshold is currently 110g/km and it is expected to reduce to 50g/km for expenditure incurred on or after 1 April 2021. Expenditure on a car within the emissions threshold is allocated to the main rate pool (18% writing down allowance (WDA) each year) and expenditure on a car exceeding the threshold is allocated to the special rate pool (6% WDA).

A 100% FYA is available for expenditure on new plant and machinery installed for the purposes of charging an electric vehicle.

Zero- and low-emission company cars (not more than 50g/km) benefit from a significantly lower benefit in kind (BIK) percentage. For low emission cars, the percentage is determined by the car’s electric range.

For 2020–21, the BIK percentage for a zero-emission car is 0% and for a low emission car it is between 0% and 12%. All percentages will increase by one percentage point for 2021–22 and (as announced at Budget 2020) again for 2022–23 so that, for example, the percentage for a zero-emission car will increase from 0% in 2020–21 to 1% in 2021–22 and to 2% in 2022–23.

The provision of electric charging facilities at or near the workplace, and made available to employees generally, does not constitute a taxable benefit in kind for the employee. Further, the employer may pay for the installation of an electric charging point at the employee’s home without a benefit in kind arising.

Any electricity provided or reimbursed by the employer in charging a company car is not regarded as ‘fuel’ and so the fuel benefit charge does not apply.

There is a grant of up to £3,000 towards the cost of buying a new low-emission vehicle. The grant is given to the dealership/manufacturer and so is reflected in the price of the vehicle.

The Workplace Charging Scheme provides a grant of up to £350 per socket (up to 40 sockets) towards the cost of purchasing and installing charge points. A similar scheme applies with regard to domestic properties – the Electric Vehicle Homecharge Scheme).

For more information and/or assistance, please contact our Tax Team who will be pleased to help you.

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Finally, in relation to VAT, under current law, an electric vehicle will still be viewed as a car for VAT purposes. Therefore, if there is any private use of the car VAT is not recoverable on purchase. The VAT can however be reclaimed if the car is used 100% for business purposes, however this can be difficult to prove to HMRC.

The advice in this column is specific to the facts surrounding the questions posed.  Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.

Contact Malachy

Malachy McLernon / Director

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