Tax treatment of electric vehicles

Published: 17 Sep 2023

Updated: 16 Oct 2023

Written by Ray Coman

Tax regulation discourages the use of cars on account of their polluting effect.  Accordingly, tax on electric vehicles are more favourable than on other types of car.  However, non-tax considerations can weigh against the investment: Electric cars tend to be higher cost.  New cars are costlier.  Rising interest rates add to the cost of a car bought on finance.  This report assess the tax implications of zero emission cars for business owners.

Deduction against profits via capital allowances

Capital allowance on sale or part exchange of an electric vehicle

Benefit-in-kind tax applied to company cars

Reasons for purchasing a car via the limited company

Claiming mileage allowance as a limited company owner

Finance and hire purchase arrangements

VAT

Recommendations

Deduction against profits via capital allowances

A business can deduct a percentage of the price of cars against taxable profits.  This type of tax relief is referred to as a capital allowance.  The higher the capital allowance, the faster the tax relief on a vehicle purchase.

For a new, electric (or other zero emission) vehicle, the capital allowance is 100%.  This means that the entire cost of the car can be written off against tax adjusted profits in year one.  This favourable rate does not apply to second hand cars.

For vehicles which do not have zero carbon emissions, including hybrid cars, and for second hand electric cars, the capital allowance rate is not 100%.  For cars with CO2 emissions above 50 grams per kilometre travelled the rate is just 6% per annum.  If the CO2 emissions are between 1g/km and 50 g/km the rate is 18% per annum.  These rates apply regardless of whether the car is new or second hand.

The Co2 of a car can be queried via the following link: https://www.gov.uk/co2-and-vehicle-tax-tools

The capital allowance regime applies in the same way to sole traders and partnerships as it does to businesses operating via limited company.

Capital allowance on sale or part exchange of an electric vehicle

The cost of the vehicle less any capital allowances is referred to as the tax written down value.  If the tax written down value is higher than sale proceeds, the balancing allowances is deducted from tax adjusted profits.  If the value is lower than sale proceeds, the 'profit' element is called a balancing charge and this is added to taxable profits when the vehicle is sold.

Accordingly, where 100% capital allowance has been claimed on purchase, any amount sold for the car for on disposal would be added back to taxable profits.  Any fall in value on sale of the vehicle which has not been written off against tax, would be deducted from profits on sale.  The shorter a car is retained in the business, the lower the impact of a lower capital allowance.  Part exchange is treated as a disposal and acquisition for tax purposes.  If a non-electric vehicle is being held by the business for a period of say two years, the majority of the tax relief is likely to be achieved in year two, and the incentive of obtaining tax relief in year one through the purchase of an electric vehicle is less persuasive.

Benefit-in-kind tax applied to company cars

The main drawback of owning a car via the company is the application of benefit-in-kind regulation.  If the car is made available in whole or in part for business use, the director or employee is treated as receiving income equal to the car’s taxable value.  The taxable value is a percentage applied to the list price of the car.  The percentage is established by both the CO2 emissions of the car and electric range in miles.  The table can be viewed in the report on company cars.

A car’s taxable value is subject to Class 1A national insurance.  At the time of writing this is the same rate as employers (or Class 1 secondary.)  Unlike employer’s national insurance, there is no threshold under which income is exempt.

Unless the taxable value is especially low, the additional cost of national insurance outweighs any benefit from deducting the cost of the car from profit chargeable to corporation tax.

If the car has CO2 emissions of 50 g/km or less and an electric range of 130 miles or more, the taxable value is just 2% of the value and this has been confirmed until 2025.  In summary, therefore, a tax drawback of purchasing a car will be considerably lower if it is low emissions and a high electric range.

Company owners looking at second hand cars and/or non-electric cars, would likely save tax by owning the car privately and recharging the company (at 45 pence per mile) for business use.

A benefit in kind is apportioned according to the number of days in the accounting year in which the car was available for use.

The taxable benefit of the car and any Class 1A National Insurance is reported annually via a form (P11d.)  The accounting cost is an additional consideration for company car owners.

Reasons for purchasing a car via the limited company

Owner managers of a company are subject to tax on the extraction of profits.  Reinvestment of profits obtain corporation tax relief, but also reduce profits otherwise subject to corporation tax.

Businesses structured as companies have an opportunity to save tax by the postponement of dividends.  The tax is saved where dividends are taxed at a lower rate in a future tax year to the year in which the profit are made.  The rate of tax applicable to a capital distribution on winding up of the business could be lower than higher rates of tax on dividends.  Postponement of dividends by reinvesting profits in a car could avoid tax.

Claiming mileage allowance as a limited company owner

Where the car has higher CO2 emissions, it is preferable to own the car privately and recharge the company for its use.  The company can be charged a mileage allowance which is deducted from profits chargeable to corporation tax.  At the time of writing the mileage allowance is 45 pence per business mile for the first 10,000 business miles travelled.

Finance and hire purchase arrangements

The timing of payment for a car does not affect entitlement to capital allowances.  Furthermore, the interest element of any instalment is deducted from profits chargeable to corporation tax.  The cost of a new electric car can be deducted from company profits in the first year of ownership, even though the outlay can be spread over the term of the arrangement.

VAT

It is rare that VAT registered businesses can reclaim VAT on the cost of the car.  The car must not only be used for business, it must also be unavailable for business use.  In practice, this means that the car would be insured for business use only.  Taxi drivers, car dealerships and driving instructors can often reclaim VAT.

If VAT cannot be recovered, any capital allowances would be calculated on the cost including VAT.

Recommendations

If the car does not meet the requirements of being new and fully electric, tax is likely to be lower by being owned privately than being owned via the company.  The car owner can claim 45 pence per business mile travelled as a tax-deductible expense for motor costs.  Sole traders or partners in a partnership can deduct part of the costs of car without having to consider the benefit-in-kind costs.