Tax implications of electric vehicles

Petrol prices have reached a high point, and half of the drivers are now considering making a move to a fully electric vehicle. For 2020-21, directors and employees will receive no taxable benefit if they drive fully electric company cars. For the previous fiscal year, 2019-20, such vehicles were taxed at a rate of 16% of the list price, indicating that considerable reductions in the taxable advantages of electric vehicles will take effect on the future date of 6 April 2020.

For example, the former charge for benefit-in kind on a £70,000 Jaguar I-pace (an all-electric vehicle with a range of 298 miles) was £11,200; however, this has been cut to nil for 2020-21. This is an incredible tax-free benefit, but it is only valid for one year, as the taxable benefit will increase as follows:

Note: Additionally, the chancellor announced in his March 2020 Budget that employees who drive fully electric business cars will be taxed at the 2% benefit-in-kind rate for 2023-24 and 2024-25.

1. Government grants
2. Salary sacrifice
3. Electricity charging points and charging costs
4. Electric vans
5. Electric bicycles
6. VAT
7. Vehicle excise duty (VED)
8. Hybrid company cars
9. Privately owned electric cars

Government grants

The governments plug-in financial support programme is intended to promote and boost the purchase of electric vehicles in the United Kingdom. The grant is limited to 35% of the purchase price, up to a maximum of £3,000, toward the plug-in electric vehicle cost. Numerous conditions must be met in order to qualify for this grant. The car must:

1. Be completely new.
2. Have less than 50g/km of CO2 emissions.
3. Be capable of travelling at least 70 miles (its electric range) without any emissions; and
4. Have a budget of less than £50,000.This is the recommended retail price (RRP) of the item, which includes VAT and delivery charges.

All completely electric vehicles will qualify, but few hybrids will not due to their insufficient electric range. The dealer will deduct the grant amount from the vehicles price.Additionally, the government offers grants for certain electric motorcycles and mopeds up to £1,500.

Additionally, the government offers a grant to help offset the cost of an electric van. These vehicles must emit fewer than 75g/km of CO2 and be capable of travelling at least 10 miles without emitting. The government will fund 20% of the purchase price of an electric van, maximum amount up to £8,000.

Salary sacrifice

If an employee receives a company car as part of a salary sacrifice arrangement, the taxable benefit is equal to the greater of the salary sacrificed or the taxable car benefit. However, if the company car emits less than 75g/km of CO2, the anti-avoidance legislation of salary sacrifice does not apply.

Thus, an employer can give fully electric and some hybrid company cars through a salary sacrifice arrangement while still allowing the employee to retain the lower benefit-in-kind tax charge.

Electricity charging points and charging costs

Businesses that install charging stations for electric vehicles on-site can claim 100 percent of these costs in the first year. If the company then permits employees to charge their own electric automobiles at the office on a daily basis, there is no taxable benefit in kind – a nice tax-free perk because electricity is not treated as fuel under tax law.

ITEPA 2003, section 149 does not apply to the employer supplying the electricity. As a result, there is no taxable benefit in kind if an employer pays for the charging costs of a pure electric company car at the office, regardless of the employees private mileage.

Electric vans

Directors and employees are also getting more interested in electric vans. From 6 April 2021, employees driving fully electric vans privately will be exempt from the van benefit charge. Thus, the electric vehicle tax is permanently reduced to nothing.

For 2020-21, employees who use their own electric vans are taxed at 80% of the standard flat-rate van benefit level. Thus, the taxable benefit for a full year usage of an electric van would be £2,792, calculated as £3,490 at an 80 percent rate.

Electric bicycles

Simply put, an electric or e-bike is a pedal bicycle that is powered by an electric motor. It is a standard bicycle equipped with an electric motor and batteries. When the rider pedals, the electric motor will help in reducing the amount of effort necessary.It is pretty common for an e-bike to equip with a 36-volt battery that takes approximately four hours to charge from empty to 100%. E-bikes have extremely low operating expenses.

When considering the tax implications, its necessary to ensure that an employee is riding an e-bike rather than an electric motorcycle. It must have a top speed of no more than 15.5 miles per hour. Additionally, the electric motors maximum power output must be 250 watts. Anything over this would imply that the employee is riding an electric motorcycle, which carries a greater personal tax burden.

VAT

Electric and non-electric vehicles are subject to the same VAT rules: both are subject to a 20% charge. As a general rule, VAT on automobiles is not recoverable. However, businesses that qualify for partial exemption can fully reclaim the VAT paid on commercial vehicles and cars that are not used for private purposes. On leased vehicles, half of the input VAT can be reclaimed.

VAT can be recovered on infrastructure costs such as charging points and associated engineering work under normal regulations, providing the charging points are supplied to the business. If the business pays for charging stations to be installed at employees residences, the charging point is delivered to the employee, and the VAT cannot be reclaimed.

Vehicle excise duty (VED)

Vehicle excise duty (VED) rates have been decreased to nil for all fully electric vehicles until at least 2025. Additionally, fully electric vehicles having a value of more than £40,000 are now free from the expensive car supplement in the vehicle excise duty. The former £320 extra supplement is no longer required. Plug-in hybrid vehicles qualify for reduced VED rates.

Hybrid company cars

Hybrid cars combine a petrol engine and an electric motor, and there are various factors to consider when calculating the taxable benefit for employees who drive such cars.

The percentage of the hybrid company cars list price that will be taxed as a benefit in kind is decided by the cars CO2 emissions, and its electric range must also be considered. Thus, the number of kilometres a hybrid company car can travel on battery power alone (its electric range) before switching to petrol will be a huge factor, as the more miles a hybrid car can travel on battery alone, the lower the taxable benefit.

Privately owned electric cars

When an employee drives his or her own electric car for business purposes, the company may pay the employee the standard tax-free mileage allowance of 45p per mile for the first 10,000 miles driven in the tax year, with further business miles reimbursed at a rate of 25p per mile.

Employees who own or lease an electric car are eligible for a grant under the Electric Vehicle Home Charge Scheme. This award covers 75% of the cost of a single charge point and installation, up to a maximum of £350 per household/eligible vehicle (Inclusive of VAT).

Conclusion

This UK government is clearly committed to increasing the number of drivers who purchase electric vehicles rather than petrol or diesel vehicles. The number and variety of electric and hybrid vehicles available continue to grow, and so does their range and charging infrastructure, resulting in the UK having the 12th highest electric vehicle sales in the world.

Switching to completely electric company cars and select hybrids provides significant tax benefits for both employers and employees. However, from a benefit-in-kind approach, picking other hybrids will result in the employee receiving less than the maximum tax benefits. Additionally, capital allowances will be reduced. As a result, careful consideration is required prior to making a purchase.

If you have any tax related questions regarding electric vehicles, please speak to one of our dns tax experts right now on 03330 886 686, or you can also e-mail us at enquiry@dnsaccountants.co.uk.

Disclaimer :-"This article was correct at the date of publication. It is intended for general purposes only and does not constitute legal or professional advice. Independent professional advice should be sought before proceeding with any transaction".

About the author

Siddharth Agarwal
I am a Chartered Tax Advisor (OMB) and ACCA. I have 9+ years of experience in owner-managed business taxation issues, company reorganisations, property taxation, and succession planning. I also work with private clients on bespoke tax planning strategies for trusts, residence status, and non-residents. I aim to fulfil my professional duties towards my clients and keep them satisfied, my utmost priority. I believe in establishing and maintaining businesses and personal relationships as the key to mutual growth.