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Electric cars

In his March Budget, the Chancellor announced the introduction of “full expensing”, i.e. allowing most plant and machinery purchases to be allowable fully for tax purposes in the year of acquisition. This was really aimed at encouraging investment by big companies, as most small companies would in any case get immediate full tax relief via the Annual Investment Allowance (AIA), which has now been set permanently at £1million p.a. However, with limited exceptions (such as dual control driving school vehicles), cars do not qualify for full expensing or the AIA. Recent controversy over ULEZs (Ultra-Low Emission Zones) has highlighted that there are many reasons, not just tax ones, why businesses may want to switch to electric or low emission vehicles. However, there are a lot of tax issues to consider when acquiring vehicles. Here are some of the key ones. There are also a lot of VAT considerations, but we will cover these in a subsequent newsletter.

 

Relief for purchases

Cars with zero emissions qualify for 100% allowance, if purchased NEW (i.e. not second-hand) before 1 April 2025. Ex-demonstrator vehicles count as new for these purposes. All other cars qualify for much slower tax relief:
• Cars up to 50g/km CO2 emissions
qualify for 18% p.a. allowances
• Cars above 50g/km qualify for 6%
p.a. allowances.

Both these allowances are given on a ‘reducing balance’ basis, meaning that the tax relief is spread slowly over many years. E.g. for a car costing £30,000 with CO2 emissions of 70g/km, the allowance in the first year will be 6% of £30,000 = £1,800; in the second year, the allowance will reduce to 6% of (£30,000-1,800) = £1,692.

Note that you have about 18 months remaining to take advantage of the 100% allowance for new electric cars.

Employer-provided cars

Where an employer makes a car available for private use to an employee or director, an annual benefit-in-kind charge applies. This is calculated by multiplying a statutory percentage by the original list price of the car. This benefit charge covers all incidental costs, such as insurance and servicing (but not private fuel). To incentivise the take-up of electric vehicles, the percentage used for such cars is 2% p.a., through to 5 April 2025. The percentage for other vehicles increases in bands, based on CO2 emissions (and for lower emission vehicles, how far they can travel in pure electric mode). The maximum percentage is 37%. Appropriate percentages for electric and ultra-low emission cars (i.e. those emitting less than 75g of CO2/km) will increase by 1 percentage point in each of 2025/26, 2026/27 and 2027/28, up to a maximum appropriate percentage of 5% for electric cars and 21% for ultra-low emission cars. Rates for all other vehicle bands will be increased by 1 percentage point for 2025/26 (but still with a maximum percentage of 37%) and will then be fixed in 2026/27 and 2027/28. Suppose, for example, that this year a new electric car is bought by a company for use by a director. Its list price is £40,000. Currently, there is a benefit charge of 2% of £40,000 = £800, on which the director will be taxed at whatever rate is appropriate to them. By 2027/28, this benefit chargewill have increased by 150% (i.e. to 5% of £40,000 = £2,000). Although this is a big jump, most people would still regard the tax payable on this charge as a price worth paying for having use of such a car, particularly as the director’s company has had full tax relief on the purchase price in year 1 and on the service and insurance costs each year. Employers’ Class 1A National Insurance will be payable by the company; this will be 13.8% of the benefit charge, but it will also be deductible for corporation tax purposes

 

Charging electric vehicles – company cars

Where the employer pays for the cost of charging an employer-provided electric vehicle, there is no taxable fuel benefit for the driver. Where the driver 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. The employer can pay the driver 10p per business mile, to reimburse them for the cost of the electricity used for business journeys, with no tax implications. This rate has been raised significantly recently to reflect prevailing electricity prices and is reviewed every three months.

 

Charging electric vehicles –employees’ own cars

Where the company allows employees to charge their own electric vehicles while at work, there is no taxable benefit for the provision of that free electricity. The charging facilities must be provided at or near the workplace (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 (e.g. at a motorway service station).

Provision of fuel by the employer

The car benefit charge for employer provided cars (described above) covers all incidental costs of running a car, except the provision of fuel. If the employer pays for fuel, an additional annual benefit charge applies, calculated (for 2023/24) as £27,800 multiplied by the percentage used in calculating the car benefit. This charge can be avoided if all private fuel costs are reimbursed to the employer, or the employer does not pay for any private fuel. The rate at which the employer may reimburse fuel for business journeys is set quarterly. See https://www.gov.uk/guidance/advisory-fuel-rates

Business mileage in employee’s personally-owned car

Where an employee or director does business travel in their own car, the employer can reimburse at a rate of 45p/ mile for the first 10,000 business miles in a tax year, then at a rate 25p/mile. If the employer pays more than these amounts, the excess is a taxable benefit; if they pay less than these limits, the employee can claim the shortfall as an expense against employment income.

Self-employed allowable motor costs

Expenses such as fuel, insurance and servicing, along with capital allowances, are allowable on a proportionate basis, based on business mileage. Those using the simplified rules for small businesses can instead claim the statutory mileage rates for business journeys (i.e. 45p/mile and 25p/mile, as appropriate). Note that travel between home and a regular ‘place of business’ is private travel, even if the home is also a place of business (e.g. because you have a home office). However, itinerant workers whose place of business is their home can normally claim travel costs to and from the locations where they carry out their work.

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