The tax regime for cars is designed to encourage the use of low emission vehicles. So exactly what are the tax benefits and is now the time to consider the move to zero or low-emission vehicles?
P11D/Class 1A National Insurance
The percentage of list price of a company car which is taxed as a benefit is determined by the CO2 emissions of the vehicle. For 2019-20, low emission cars (up to 50g/km) are taxed at 16% of list price, or 20% for diesels. However, there have been significant reductions in this charge from April 2020 with electric-only cars falling to 0% in 2020-21 as well as reductions for electric hybrids depending on their electric-only range.
For example, a VW Passat GTE with CO2 levels of 32 g/km and an electric only range of between 30 and 39 miles would have a benefit rate of 12% in 2020-21, equating to a taxable benefit of approximately £4,300.
Where an employee has a car provided under salary sacrifice, the benefit is valued as the higher of the amount of salary given up or the taxable benefit. However, the optional remuneration rules do not apply if the company car has CO2 emissions of less than 75g/km. Note that this is a different definition of low emissions from that used for capital allowances.
The taxable benefit for having the private use of a zero-emission van reduces from April 2021 to nil.
Please note that for non-electric vans there is no taxable benefit at all if the van is only used for business journeys and ordinary commuting, irrespective of fuel type.
In looking at the tax position for two wheels rather than four, we need to distinguish between a bicycle with an electric motor and a motorbike. An electric bicycle cannot have a motor powered top speed in excess of 15.5 mph and the electric motor must be less than 250 watts in power. Anything above this would be classed as a motorbike/moped.
Why is this important? An electric bicycle will still qualify for the Cycle to Work Scheme, so can be provided without a P11D benefit in kind arising. For existing Cycle to Work scheme members, the government has recently announced due to the pandemic, a relaxation in the requirement to use the bike for work journeys at least 50% of the time. This relaxation will apply to all participant in a scheme on or before 20 December 2021 and this will last until April 2022.
However, there are no specific tax advantages for an electric motorcycle and these are taxed under general use of asset rules in the same way as their petrol-powered equivalents.
Vehicle Excise Duty
The road tax, or Vehicle Excise Duty (VED), rates for all pure-electric vehicles have been reduced to £0 until at least 2025. There are reduced VED rates for plug-in hybrid electric vehicles (PHEVs).
From 6 April 2020, businesses can claim 100% of the cost of an electric vehicle against the profits of the year of purchase and there are no restrictions on the value of the vehicle.
Businesses can benefit from the new super-deduction, which offers 130% first-year allowance on qualifying electric charging points for cars and vans. To qualify for the relief the company must use the charging point in their own business. This will last until 31 March 2023.
From 1 April 2021, pure zero emission car can qualify for a 100% first year allowance (FYA) and the car is purchased new and unused. A similar 100% FYA applies for zero emission vans, where the vehicle is purchased new and unused before 1 April 2021. Commercial vehicles already qualified for 100% relief under the Annual Investment Allowance.
Cars with CO2 emissions not exceeding 50g/km will be added to the main pool for capital allowance purposes, so attract an annual writing down allowance (WDA) of 18%. Cars with CO2 emissions exceeding 50g/km must be allocated to the special rate pool, where the WDA is 6%.
Electric bikes will also qualify for the Annual Investment Allowance.
The government’s plug-in car grant is designed to promote the uptake of electric vehicles in the UK. From 18 March 2021 the government will provide grants of up to £2,500 towards the cost of an eligible plug-in vehicle where it costs less than £35,000. Therefore, this will cease to apply for higher priced vehicles.
The plug-in car grant applies at the time of purchase and is usually given as a discount off the purchase price of a vehicle.
The vehicle must have an electric range of at least 70 miles.If plug-in hybrid, the vehicle must also have combined CO2 emissions of 50g/km or less.
This means all major full battery electric vehicles (BEVs) qualify, but few PHEVs are eligible.
Grant for Small vans is £3,000 (less than 2,500 kg gross vehicle weight) and for large vans £6,000 (between 2,500 kg and 3,500 kg gross vehicle weight).
Electric charge points and charging costs
Where the business installs charging points for electric vehicles up to 31 March 2023, it can claim a 100% FYA for those costs.
From 6 April 2018, where the company allows employees to charge their own electric vehicles at the workplace, there is no taxable benefit for the provision of that free electricity.
For this tax exemption to apply, the charging facilities must be provided at or near the workplace, which is the same requirement that applies to tax-free workplace parking. This tax exemption does not apply if the employer reimburses the costs of charging the employee’s own vehicle away from the workplace, such as at a motorway service station.
Where the employer pays for the cost of charging the company-provided electric vehicle there is no taxable fuel benefit for the driver, as electricity is not classified as a fuel for the car or van benefit regulations.
Where the driver of the electric vehicle pays for the electricity to power it, either from their domestic supply or by charging at a roadside station, the employer may reimburse the employee for that cost. With a roadside charge it is easy to see what the total cost is, but it is not so easy to calculate the cost per mile when charging from a domestic supply.
This problem has now been solved, as the employer can pay the company car driver 4p per mile, to reimburse them for the cost of the electricity used for business journeys with no tax implications. This rate only applies to company-owned electric cars, not to private vehicles.
Under current law, an electric vehicle will still be viewed as a car for VAT purposes. Therefore, VAT is not recoverable on purchase, unless it can be demonstrated that the car is only available and used solely for business purposes. In practice this is very difficult to achieve.
The same VAT recovery rules also apply for leasing purposes with 50% VAT recovery on the leasing charge available. Full VAT recovery, subject to the usual partial exemption and business use tests, is available on ongoing maintenance of leased cars.
It is hoped that HM Revenue & Customs will address the position in respect of private “fuel” as the current guidance for the calculation of the fuel scale charge is targeted at petrol or diesel cars.
Privately owned electric cars
Where the employee uses his or her own electric car for business journeys, the company can pay the normal tax-free mileage allowance to the individual of 45p per mile for the first 10,000 miles driven in the year, with additional business miles reimbursed at 25p per mile.
Where the employee owns or leases the electric car, they will be entitled to a grant under the Electric Vehicle Homecharge Scheme. This grant covers a 75% contribution towards the cost of one charge point and its installation, up to a maximum of £350 (including VAT) per household/eligible vehicle.