Electric Cars - Understanding the Tax Implications Milton Keynes & Wellingborough : Crouchers

Electric Cars - Understanding the Tax Implications

As the push towards sustainable transport intensifies, electric vehicles (EVs) have become central to reducing carbon emissions and decreasing reliance on fossil fuels. Beyond their environmental benefits, EVs offer significant tax advantages for both consumers and businesses.

The Crouchers Team

08 July 2024

3 min read

As the push towards sustainable transport intensifies, electric vehicles (EVs) have become central to reducing carbon emissions and decreasing reliance on fossil fuels. Beyond their environmental benefits, EVs offer significant tax advantages for both consumers and businesses. In this article, we explore the various tax implications of owning and using electric cars, providing essential insights to help you advise your clients effectively.

Tax Relief for Businesses

Capital Allowances on Electric Cars

Businesses, whether limited company or unincorporated entities, can benefit from several types of capital allowances. It's important to know which allowances apply to car purchases.

100% First Year Allowances

New and unused electric cars and their charging equipment qualify for 100% first year allowances, allowing businesses to deduct the full cost from profits in the year of purchase. This significant tax relief, also known as enhanced capital allowances, supports businesses investing in sustainable transport.

Annual Investment Allowance (AIA)

The AIA allows businesses to deduct the full value of qualifying plant and machinery from profits in the year of purchase. However, business cars, including electric ones, are excluded from AIA claims.

Full Expensing

Available only to companies for capital expenditures incurred since 1 April 2023, full expensing offers immediate tax relief on plant and machinery investments. However, cars are excluded from this relief, meaning electric cars do not qualify.

Main Rate and Special Rate Allowances

Second-hand electric cars and new or second-hand hybrid cars with CO2 emissions of 50g/km or less are eligible for main rate allowances, permitting an 18% annual deduction of the car’s value on a reducing balance basis. For cars with emissions over 50g/km, only a 6% annual special rate allowance applies.

VAT on Electric Cars and Charging

Purchasing Electric Cars

Electric cars, like all cars, are subject to 20% VAT on the net sale price. Businesses can reclaim this VAT only if the car is used 100% for business purposes, a rare scenario.

Leasing Electric Cars

For leased electric cars, businesses can reclaim 50% of the VAT on lease costs, similar to conventional cars. Note: If a company leases an electric vehicle, they cannot claim the 100% First year allowance (as they do not own the vehicle), instead the lease payments will go through the profit and loss account and will reduce the company’s profit and corporation tax.

Charging Electric Vehicles

The VAT rate on electricity used for charging depends on where the car is charged. Home charging with a domestic tariff incurs a 5% VAT rate, while public or business premises charging, typically on a business tariff, incurs a 20% VAT rate.

Reclaiming VAT on Charging Costs

Sole proprietors can recover VAT on home charging costs. Employers reimbursing employees for home charging cannot reclaim this VAT due to the supply being in the employee's name. Conversely, VAT can be reclaimed when employees charge vehicles at business premises proportionate to business use.

Vehicle Excise Duty (Road Tax)

Currently, electric cars are exempt from vehicle excise duty (road tax). However, from 1 April 2025, new electric cars will incur road tax starting at £10 for the first year, increasing to the standard rate of £180 from the second year onwards.

Running Costs and Congestion Charges

Businesses can deduct running costs for electric vehicles, including road tax and servicing, from pre-tax profits. Electric vehicles are also exempt from congestion charges in low emission zones, offering further savings.

Government Grants

While the plug-in car grant for electric vehicles has ended, other types of electric vehicles still qualify for grants. Additionally, businesses can benefit from the Workplace Charging Scheme, which subsidises the installation of charging points.

Tax Relief for Employees

Company Car Tax

Electric company cars attract significantly lower benefit-in-kind (BIK) rates compared to petrol or diesel cars. For the 2023/24 and 2024/25 tax years, the BIK rate for electric cars is just 2%, making them a cost-effective perk for employees.

Fuel Benefit

There is no fuel benefit charge when employers directly pay for charging electric company cars. However, if employees are reimbursed for home charging, this reimbursement must be treated as earnings subject to PAYE and national insurance.

Claiming Mileage

Employees can claim mileage for business travel in electric cars at HMRC-approved rates. For privately owned electric cars, the rate is 45p per mile for the first 10,000 miles, dropping to 25p thereafter. Company car drivers can claim at advisory fuel rates, updated quarterly.

Company Vans

Zero emission company vans do not attract a van benefit charge, though they must still be reported on the P11D form. There is also no van fuel benefit charge for workplace charging.

How Crouchers Ltd Can Help

The tax landscape for electric vehicles is evolving, with numerous benefits currently available. At Crouchers Ltd, we stay updated on these changes to help you make the most of these incentives.

Written by

The Crouchers Team

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