The government has introduced a range of tax incentives for businesses aimed at a net-zero economy by 2050, and with the technology behind electric cars continuing to get better every year ‘going green, by going electric’ is an increasingly popular choice.
Tesla is taking the market by storm offering an eco-friendly alternative to traditional cars enticing many business owners to choose electric vehicles for business.
But do electric vehicles offer more than just economic and environmental benefits and should you buy an electric car privately, or through your limited company?
There is no one size fits all answer….
Business owners considering purchasing a vehicle should consider:
– the price of the car,
– its CO2 emissions (if any),
– the year it was registered,
– the amount of business mileage,
– your personal and business tax affairs,
– any corporation tax and VAT implications,
– any national insurance implications for the company
– linking any calculations with your current salary and dividends,
– car calculations (hire purchase, finance lease, and operating lease).
Buying an electric vehicle and taxes
Generally higher rate taxpayers will make a substantial saving in the short term, with gains decreasing each year of use.
VAT
To reclaim the VAT on any car, it needs to be used exclusively for business and for HMRC purposes your usual commute between home and office is counted as personal rather than business travel.
If the car is to be used for a mix of personal and business journeys then the VAT treatment will be the same whether you buy it personally, or through the business – you can’t reclaim any of it.
Corporation tax
If you buy an electric car through the business you can offset part of the cost against your corporation tax bill. With most cars this deduction will be applied gradually over time, however with electric cars you can claim the full deduction in the year you buy it.
If you buy a car personally (rather than through your business) you will have to use cash that has already been subject to corporation tax and income tax.
Business mileage
If you use your personal car for business journeys then you can charge the company 45p per mile for the first 10,000 miles and then 25p per mile after that.
Income tax and national insurance
If you buy a car through your business, but intend to also use it for personal use this will create a ‘Benefit in Kind’ (BIK). This will count as though the business has paid you additional income and there will be income tax and national insurance to pay as a result.
You’ll also need to complete an additional filing called a P11D once a year.
Since 2020, the ‘benefit in kind’ percentage has been rising – increasing from 0% to 1% from March 2021, with a rise to 2% from 6th March 2022.
The valuation of the benefit in kind depends on the list price of the car and its CO2 emissions.
For example, a fully electric car that cost £50,000 would give rise to a benefit in kind of £0 in 2020/21 (with the exact amount changing each year).
Buying a car through your business – example
As a higher rate taxpayer you buy a £50k +VAT car through your business and you will be using it 50/50 for business and personal use.
Car purchase price: £50,000
VAT (20%): £10,000
Corporation tax deduction (19%): -£9,500
Income tax saved: -£24,000
National insurance saved: -£7,200
Benefit in kind tax (£6,500 * 40%): £2,600
Class 1A national insurance (£6,500 * 13.8%): £897
Net cost after one year: £29,997
(The income tax deduction and national insurance saving takes into account the tax that you would have to pay if you were to use income acquired via salary to buy the car. This is the best possible case saving and is likely to be lower.)
Buying a car personally – example
You buy a £50k +VAT car personally and you will be using it 50/50 for business and personal use, accumulating 4,000 business miles per year.
Car purchase price: £50,000
VAT (20%): £10,000
Business mileage deduction (4,000 * 45p): £450
Net cost after one year: £59,550
Other considerations
- Vehicle excise duty on electric vehicles is substantially cheaper than on other cars.
- There is no capital gains tax on selling cars.
- Electric cars are currently exempt from the London Congestion Charge.
Is the car going to be used 100% for business, or will it also be used privately?
You can only reclaim VAT on a car if it is used exclusively for business, and you can prove to HMRC that it is not available for private use by yourself or your employees, (a good example of this is a pool car that is kept on site overnight and is readily available for any employee to use for business purposes throughout the working day).
Exceptions where you can reclaim the VAT are when the vehicle is to be used primarily as a taxi, for driving instruction or for self-drive hire.
Driving to and from your regular place of work is known as your ordinary commute and is not considered to be business use by HMRC. This means that even if you use the vehicle solely to travel to and from your workplace, you cannot reclaim the VAT.
If the vehicle does have a private use element this will give rise to a benefit in kind on which you may be required to pay Income Tax. The company will also be required to pay Class 1A National Insurance on this benefit.
CO2 emissions and car purchases
The CO2 (carbon dioxide) emissions produced by a car directly affect the deemed benefit for which you will be taxed and the percentage at which capital allowances can be claimed on the vehicle expenditure – hence why going electric appeals to more and more business owners!
BiK rates are set by the UK government and are determined by how much CO2 a car emits, which fuel it’s powered by and the emissions standard it meets. Currently, BiK rates range from 0% to 37%, so with Tesla sitting in the 1% range you can see why as an electric vehicle they are a more attractive option. (The deemed benefit in kind of the vehicle is calculated by multiplying the list price of the car by the CO2 emissions percentage of the car).
The greater the amount of CO2 produced by the car, the higher the CO2 percentage will be, resulting in a higher benefit on which you will have to pay tax.
Capital Allowances
When a company buys an asset (including a car) it is not treated as an expense that can be deducted from profit for tax purposes.
Tax relief is obtained through Capital Allowances, which have specific rules as to how much can be claimed.
In relation to cars the amount of Capital Allowances that can be claimed directly correlates to the level of CO2 emissions the car produces. It follows the same logic as with the benefit in kind calculation so the more CO2 the car produces, the less tax relief you can claim. However, Capital Allowances are simpler as there are just 3 bands to consider rather than a whole scale of percentages.
If the car’s CO2 emissions are 95g/km or less, 100% of the price of the car can be claimed (i.e. deducted from profit) in the first year, provided that it is a new car. If the CO2 emissions are between 96g/km and 130g/km the rate at which capital allowances can be claimed is 18% per annum. For CO2 emission levels above 130g/km the capital allowance rate is 8% per annum.
From a benefit in kind and Capital Allowance point of view, it makes much more sense to buy a more environmentally friendly vehicle to save the greatest amount of tax – another benefit of going electric!
Fuel
There are several rules to consider around providing fuel for yourself or employees. Again, it is important to distinguish between business fuel and private fuel.
If any fuel is provided for private use, then the employee will be deemed to be receiving a taxable benefit based on the CO2 emission regardless of how much fuel has actually been provided to the employee for private mileage.
If fuel is provided solely for business use there is no benefit in kind and so no additional tax to be paid; however, HMRC would require proof that none of the fuel was used for private purposes. This could be demonstrated through accurate mileage records or payments made by the employee back to the company for any private fuel. One thing to note, the same rules apply regarding the ordinary commute, this is not classed as business travel.
There is also the VAT on the fuel to consider from the company’s perspective. If the fuel is used solely for business use, then all the VAT on fuel can be reclaimed. If there is private usage of fuel paid for by the business, then this needs to be taken into account. This is applied through a fuel scale charge. Essentially the company will reclaim all the VAT on the fuel and then pay the appropriate fuel scale charge to HMRC to make up for the estimated private use element. Once again, this charge is based on the CO2 emissions of the vehicle.
The latest fuel scale charge can be found here.
Mileage
The easiest way to reimburse yourself and employees for business travel is by sticking to HMRC’s defined tax-free mileage allowances. This allows an employee to be reimbursed up to 45p per mile for the first 10,000 business miles in any given tax year using a private vehicle and 25p per mile for any business mileage thereafter. Provided there are accurate mileage records for business travel this amount will be tax free.
If the employee does use a privately fuelled company car, and you wish to reimburse them for their business fuel, there are advisory fuel rates provided by HMRC which if paid, will not give rise to an additional tax charge. These rates vary depending on the size of the car’s engine and fuel type.
Weighing up the costs and benefits of buying a car and paying for travel through your business is not always straightforward.
Tax incentives & grants
Exploring the benefits of electrical vehicles alongside the government range of tax incentives for businesses you can refer to the list of vehicles eligible for the government’s ‘plug-in’ grant. The grant offers a discount of up to £3,000 on the price of an electric car and £350 on the cost of installing a charger.
By choosing an electric car, your company can claim a 100% first-year allowance on the cost of the vehicle provided it is purchased new. This is an enhanced rate of capital allowances which would reduce your company’s taxable profits for the accounting period in which the car is acquired – saving corporation tax at 19%. The claim could also include the cost of installing a charging point.
Dual charges
When the first-year allowance is claimed, it is important to remember that any proceeds from the sale of the car will create a balancing charge and a corporation tax charge on the company.
If the car is made available to you, there will be a taxable benefit in respect of your private use of the car. The value of a company car benefit is calculated by taking the list price of the car and multiplying it by a percentage based on the car’s CO2 emissions.
‘Fully electric’ = no hybrids
At present, a zero-percent rate applies to cars which are fully electric and do not emit CO2. This is set to rise to 1% in the 2021/22 tax year and 2% in 2022/23 but will remain lower than the rates for petrol and diesel cars, which can be as high as 37%. The lower benefit value also results in a saving of Class 1A National Insurance Contributions for your company.
If the company covers the cost of re-charging your car, there will not be a taxable benefit on you personally as electricity is not classified as fuel. Similarly, there will not be a taxable benefit on you if the company covers the cost of installing a charger at your home.
Recovery, and speed
If you pay for the electricity to power your car, either at home or at a charging point, you can recover the cost from your company. This is straightforward where you receive a receipt from the charging station but not so straightforward when you have to calculate the cost per mile from your domestic bill! In this instance, the company can reimburse you at a rate of 4p per mile for business journeys (the Advisory Electric Rate), without any personal tax implications.
Saving tax
Provided the car is brand new, it will qualify for Enhanced Capital Allowances. A first-year allowance which allows the company to deduct the full cost from profits before tax. This is in addition to the normal Annual Investment Allowance.
If you are registered for VAT, you can potentially reclaim 50% of the VAT on lease payments. You can claim 100% if the car is for 100% business use only and not available for personal use. If you buy the car, you can claim 100% VAT only if it’s not available for personal use at all.
If you install a charging point at work, currently this qualifies for the first-year allowance.
For an Employee
If the car is an ultra-low emission vehicle (<75g/km) it can be provided to an employee using a salary sacrifice scheme. The money is taken from the employee’s salary before tax and National Insurance is worked out. This will mean a lower National Insurance bill for both the employer and employee. For the employee, there is a ‘discount’ as less National Insurance is paid on the salary.
The popularity of electric cars is growing, with more manufacturers announcing their intentions to become all-electric. Wise advice is to act soon on the tax benefits because when electric vehicles become mainstream, one-off incentives may no longer be available.
Electric cars will help you reduce your environmental impact, ongoing costs, and save you tax. The most well-known electric car – Tesla, has its Model 3 available now making it a great option for business owners and employees alike.
How much tax you’ll save will vary depending on your personal circumstances, but hopefully this blog has provided a good starting point. If you’d like us to work out exactly how much tax you’d save if you purchased or leased an electric car through your business, please get in touch with Samantha at Cooper Accounting today.
Have some questions?
If you have any questions about buying a company car via your business or a personal purchase, or if you would like to calculate how much tax you could save, simply reach out to Cooper Accounting via telephone or email and let our expert Accountants answer your questions.
