Tax & Electric Vehicles – What you need to know

Frequently Asked Business Question:

I operate a small owner-managed company and my lease is up for renewal on my diesel company car. I am considering having the company replace my car with an electric car but I would like to understand the tax benefits?

Top Tip:

The next few years will see a transport revolution as the UK Government seeks to deliver on its commitment to phase out the sale of new petrol and diesel cars from 2035. I set out below some of the key tax incentives for a company looking to purchase an electric car for use by a director or employee, highlighting some of the changes due to come into effect later this year.

An electric car is a car that runs on electricity at least some of the time. The main types of electric vehicle are:

• the all-electric vehicle (AEV). In this case, the car’s battery is its only power source and it is recharged by plugging it into the grid via a charge point. An AEV has zero direct (tailpipe) CO₂emissions;
• the plug-in hybrid electric vehicle (PHEV). This is a car that switches between running on electricity and fossil fuels. As with the AEV, the battery is recharged by plugging it into the grid.
• the hybrid electric vehicle (HEV). Here, the battery can only be recharged while driving. Typically, HEVs can drive in battery mode for only a few miles.

In general terms, tax incentives are restricted to AEVs and to a lesser extent, PHEVs.

For expenditure incurred before 1 April 2021, a 100% First Year Allowance (FYA) is available for a new car which is an ‘electrically-propelled’ car or which has low C0₂ emissions. An ‘electrically-propelled’ car is a car that is propelled solely by electric power (i.e. it is an AEV). A car has low CO₂ emissions where the emissions do not exceed 50 g/km (typically, a PHEV).

Cars that do not qualify for a FYA are allocated to a pool by reference to an emissions threshold. The emissions threshold is currently 110g/km and it is expected to reduce to 50g/km for expenditure incurred on or after 1 April 2021. Expenditure on a car within the emissions threshold is allocated to the main rate pool (18% writing down allowance (WDA) each year) and expenditure on a car exceeding the threshold is allocated to the special rate pool (6% WDA).

A 100% FYA is available for expenditure on new plant and machinery installed for the purposes of charging an electric vehicle.

Zero- and low-emission company cars (not more than 50g/km) benefit from a significantly lower benefit in kind (BIK) percentage. For low emission cars, the percentage is determined by the car’s electric range.

For 2020–21, the BIK percentage for a zero-emission car is 0% and for a low emission car it is between 0% and 12%. All percentages will increase by one percentage point for 2021–22 and (as announced at Budget 2020) again for 2022–23 so that, for example, the percentage for a zero-emission car will increase from 0% in 2020–21 to 1% in 2021–22 and to 2% in 2022–23.

The provision of electric charging facilities at or near the workplace, and made available to employees generally, does not constitute a taxable benefit in kind for the employee. Further, the employer may pay for the installation of an electric charging point at the employee’s home without a benefit in kind arising.

Any electricity provided or reimbursed by the employer in charging a company car is not regarded as ‘fuel’ and so the fuel benefit charge does not apply.

There is a grant of up to £3,000 towards the cost of buying a new low-emission vehicle. The grant is given to the dealership/manufacturer and so is reflected in the price of the vehicle.

The Workplace Charging Scheme provides a grant of up to £350 per socket (up to 40 sockets) towards the cost of purchasing and installing charge points. A similar scheme applies with regard to domestic properties – the Electric Vehicle Homecharge Scheme).

For more information and/or assistance, please contact our Tax Team who will be pleased to help you.