Benefits of Electric Cars

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Introducing electric cars into a business or organisation is no longer just about social responsibility.  There are a number of benefits to driving an electric car, including some serious financial incentives such as electric car benefit in kind.  There are also other considerations you need to make too.  The main points to consider are listed below.

Benefits in kind

When an employee is given use of a company car by their employer, this is classed as a benefit in kind, which is taxable on the employee.  The benefit in kind is calculated based on two main factors; the list price of the vehicle and the CO2 emissions of the vehicle.

For the tax year commencing 6 April 2021, the benefit in kind rate for electric cars is 1% of the vehicle list price.  For example, if an employee has use of a company car for the full tax year commencing 6 April 2021 that is an electric car and has a list price of £40,000, the benefit in kind arising will be as follows: -

£40,000 @ 1%  =  £400  

The tax payable by the employee on this benefit in kind will be dependent on that employee’s other income.  For a higher rate (40%) tax payer, for example, the tax payable on the above benefit in kind would be £160 per annum.
When you compare this to other non-electric vehicles as an example, a petrol car with CO2 emissions of 90 g/km would have a benefit in kind of 23% multiplied by the list price.  Using the above example, this would lead to a benefit in kind of £9,200.  For a higher rate tax payer, the tax payable on that benefit in kind would be £3,680.

Class 1A National Insurance is also payable by the employer at a rate of 13.8% of the total benefits in kind arising in a tax year, and therefore the low benefit in kind arising on electric cars gives rise to a much reduced Class 1A National Insurance liability also.

Tax law does not treat electricity as fuel and as such, there is no benefit in kind implications of an employee charging the car at their place of work using the employer’s electric. This is regardless of private mileage. In addition, there are no benefit in kind implications of an employer paying for a vehicle charging point to be installed at an employee’s home or of providing a charge card to allow access to commercial charging point.

As the car belongs to the company rather than the individual, the company will also usually be responsible for the maintenance, insurance and upkeep of the car.

Since September 2018, employers can pay employees up to 4 pence per mile for business travel in an electric company car.
 

Employee’s personal electric car

If an employee uses their own electric car for business purposes, approved mileage allowance payments apply in the same way as for petrol and diesel cars.

As with a company car, there are no benefit in kind charges if a personal electric car is charged at the place of work using the employer’s electric.  However, unlike with a company car, a benefit in kind charge would occur if the employer paid for a charging point to be fitted at the employee’s home, or if a charge card is provided to access commercial charging points.

Electric cars and Members/Partners

Many of the tax advantages of a pure electric car are related to the generous rates regarding benefits in kind for employees, as outlined above, which are not therefore relevant to individual self-employed members in an LLP, partners in a partnership or sole traders.

Vehicle Excise Duty

Electric cars (with 0g/km emissions) are also exempt from Vehicle Excise Duty (road tax), with Hybrid versions also enjoying a much reduced Vehicle Excise Duty in comparison to diesel/alternative fuel cars.

Capital allowances

From a business tax point of view, a business is able to claim 100% First Year allowances on the purchase of electric cars (with 0g/km emissions), in comparison to the main rate of capital allowances on other standard vehicles, which are either 18% or 6% depending on CO2 emissions of the car.  When considering an electric car costing £40,000 as per the above example, the tax saving by purchasing an electric car compared to a standard vehicle would be significant.

Although the enhanced capital allowances on the purchase of electric vehicles can provide an immediate tax saving, it is important to note that balancing charges are likely to occur upon the sale of the vehicle and is likely to increase the tax due at that point (particularly if cars are changed regularly within a business). The tax saved on purchase should therefore be viewed as a cash flow advantage rather than an absolute saving.

The enhanced capital allowances are available for all businesses and are therefore relevant for LLPs, partnerships and sole traders as well as limited companies, and would reduce the taxable profit in the year when the vehicle is purchased.

Method of purchase

Consideration is required as to how you purchase your vehicle, as the accounting treatment, tax treatment and VAT treatment are all different between leasing, hire purchase and outright purchase.

As an example, when leasing a car, your firm would not receive capital allowances for the cost of the vehicle but would instead receive tax relief for the rental payments and some VAT would be recoverable from those rental payments. Whereas the hire purchase of a car means that capital allowances are received, and tax relief is also received for interest paid, but no VAT would be recoverable.

This is a complicated area and the correct treatment is not always obvious from the agreements provided by dealerships and so advice should be sought prior to making a firm commitment.  

Congestion charge exemptions

Electric cars are also exempt from the ‘Congestion Charge Tax’, and therefore if your company cars are travelling in areas where clean air zones exist, this will provide a further saving (the Congestion Charge is currently £15 per day between 7am to 10pm).

Summary

The government is keen to get companies thinking about the tax benefits of having electric cars in their business, both by offering generous tax incentives of having these vehicles in the business, and also some fairly large tax consequences for having alternative petrol/diesel cars in the business.  The environmental impact of having these ‘greener’ cars in the business is clearly something that the government are keen to encourage.