The electric vehicle revolution – tax implications for electric company cars

18th October 2019

Electric vehicles are rapidly changing the face of the automotive industry, and with the impact of increased accessibility and environmental awareness, the amount of electric vehicles globally reached 5 million by the end of 2018, compared with just 14,260 in 2010*.

Electric Car

The Committee on Climate Change (CCC) has proposed a recommendation to the UK government regarding electric vehicle growth, suggesting 60% of all new cars sold by 2030 should be electric. With poor air quality currently one of the greatest environmental risks to health in the UK, with an estimated 40,000 early associated deaths each year and £20 billion per annum cost to the economy, there’s an increased momentum towards change.

In response, the government has introduced a range of special tax measures to encourage the take up of low and zero-emissions vehicles. This blog focuses on the employment tax implications of electric cars and the capital allowances available to businesses

What are the tax implications for employees when using an electric company car?

When an employer provides an electric car to their employee, and it’s also available for private use, a taxable benefit will arise. Although the benefit is calculated in exactly the same way for all company cars, pure-electric cars (otherwise known as ‘plug-in’ cars) must include the cost of the battery in the overall value of the car, even if the battery is rented separately. The overall value of the car is then used in the calculation of the tax liability for the employee. The primary difference is that the benefit in kind (BIK) rate for zero-emissions vehicles is significantly lower. Company car drivers with a pure-electric car in 2020/21 will pay no tax on the benefit in kind.

The rates for the next three tax years are as follows**.

Tax Year

BIK Rate

2020/21

0%

2021/22

1%

2022/22

2%

 

Changes to the taxation of employee benefits were introduced in 2017 to remove the tax advantages of optional arrangements, such as salary sacrifice schemes, often resulting in an increased tax liability for employees. However, due to the environmental advantages of ultra-low emissions vehicles, they’re exempt from these changes and employees can still benefit from a reduced income tax liability. Both employees and employers can also benefit from a reduced national insurance liability when an ultra low emissions vehicle is purchased through a salary sacrifice agreement.

Another advantage for employees is that the ‘car fuel benefit’, a tax for employees who have been given ‘free fuel’ to use in personal hours, will not apply to any electricity supplied by an employer for pure-electric cars as tax law does not currently treat electricity as a fuel for these purposes. This only applies if the car is charged at or near the workplace.

Where an employer reimburses an employee for the cost of the electricity and the car has been used for business only, the amount will be exempt; being fully deductible from an employee’s earnings. Where there is both business and private use, the amount reimbursed will be taxed as employee earnings, with the employee able to claim a deduction for the cost of the business miles element.  Difficulties can arise in calculating the cost per mile when an employee charges a company car from a domestic supply, however, since 1 September 2018, the employer can pay the employee 4 pence per business mile (Advisory Fuel Rates), to reimburse the cost of the electricity used for business journeys, with no tax implications.

What happens if an employee uses their own electric car for business purposes?

If an employee owns an electric car and uses it for business purposes, Approved Mileage Allowance Payments (AMAPs) will apply. These reimbursements will be tax and NIC free providing the AMAP rates are not exceeded. 

However, it’s worth noting that an employee will receive a taxable benefit if their employer pays to install a charging point at the employee’s home, provides a charge card and/or pays to lease a battery for the employee’s car.

In effect since 6 April 2018, there has been no benefit in kind on electricity that employers provide to charge personally owned electric vehicles, providing the charging facilities are at, or near, the workplace.

What are the company benefits of investing in electric cars?

If a company purchases new and unused pure-electric cars, they will qualify for Enhanced Capital Allowances (ECA).  HMRC accepts that a car qualifies to be ‘new and unused’ even if a small number of miles have been driven for the purposes of testing, delivery, test driven by potential purchaser, or used as a demonstrator car. The ECA scheme, which looks to encourage investment into highly energy efficient technologies, is available for low and zero-emission vehicles until 2021 and allows companies to claim 100% tax relief, if claimed in the year of purchase (also known as a first year allowance). Additionally, businesses that install new and unused charging points for electric vehicles in the period until 31 March 2023 can also claim a 100% first year allowance for those costs.

If you’re interested in investing in an electric vehicle as a company car and would like further information on the tax implications doing so, or simply for further information, contact our tax team today on 01926 422292 or email Vanessa.Glenn@hboltd.co.uk

*House of Commons Business, Energy and Industrial Strategy Committee Electric vehicles: driving the transition Fourteenth Report of Session 2017–19
** The rates shown are applicable to pure-electric cars registered both before and after 6 April 2020, although the 0% BIK rate in 2020/21 will also apply to plug-in hybrid cars registered from 6 April 2020 with emissions from 1-50g/km, which can travel at least 130 miles as a pure-electric vehicle.