Tax implications of switching to an electric car

what are the tax implications of switching to an electric car- spotlight accounting

With increased electric range, rising fuel costs and reduced tax rates* Electric cars are becoming a more popular choice for business owners, employees and employers. Businesses of all sizes are making the climate pledge to be carbon neutral so switching to electric vehicles can help towards this pledge.

So what are the tax implications of switching to an electric car? This blog post should help explain.

Are electric cars more tax efficient than petrol/ diesel cars?

In short yes, with the climate pledge to cut emissions by 78% by 2035, compared with 1990 levels. There have been lots of benefits of electric vehicles in tax legislation to encourage drivers to move to fully electric cars.

For an employee driving a company provided electric vehicle there will be a lot less tax to pay on an electric car than on a traditional petrol and diesel car.

Firstly the company car tax is a lot lower on electric cars than on petrol / diesel equivalents.

A cars benefit in kind tax is based on the list price of the vehicle when new with an ‘appropriate percentage’ which is determined annually by HMRC. As an example a Volvo XC40 as an example that has both a hybrid and electric option. The benefit of the hybrid vehicle is £6,204, against a benefit of £911 for the fully electric vehicle. The saving to a higher rate tax payer is £2,117 per annum based on 2022/23 rates.

There is also no taxable fuel benefit in kind for electric vehicles so a company can pay to charge an electric vehicle without any taxable benefit to the employee.

A company car driver can therefore have a fully funded electric car for a small amount of tax. Using the Volvo XC40 above a higher rate tax payer would pay £365 in tax per annum for the fully electric car.

How do you tax an electric car?

Battery electric motor vehicles are currently exempt from vehicle excise duty (VED) therefore there is no road tax to pay, the owner of the vehicle still has to register with the DVLA and renew each year.

Whist there is currently no vehicle excise duty on electric vehicles this could change.

What are the tax implications of switching to an electric car?

Company owned electric cars can give great tax incentives. Over recent years having a company car has worsened a business owners tax position rather than giving any sort of tax benefits.

The main tax benefit of electric vehicles for an employee is the significant reductions in the benefit in kind charge, fully electric company cars have a benefit in kind of 2% of the list price of the vehicle in 2022/23.

The benefit in kind for a Tesla Model 3 would be £850.00 compared to an Audi A4 Saloon of £10,972. For a higher rate tax payer this could be a saving of £4,049 per annum in company car tax.

For an employer one of the specific tax advantages is the favourable capital allowances on fully electric cars. Where an electric company car is purchased the business can claim 100% of the vehicle costs against pre tax profits.

Using the example above the corporation tax relief through claiming capital allowances in the year of purchasing a Tesla Model 3 would be £8,075.

Whilst an employer has to pay class 1a national insurance on the benefit in kind value of the electric car on the Tesla Model 3 this would be £128.00.

If an employer provides an electric charging point at an employees home there are no tax implications of this. With the abolition of the electric vehicle home-charge scheme this can be a great tax free incentive for employees.

Installation of electric charging points can also be another tax free way of extracting value out of the business.

Normally where an employer reimburses or pays for fuel i.e charging costs at home then there is a fuel benefit.

However currently there is no taxable benefit for electric cars. The employer can either pay the cost of charging the vehicle or reimburse the employee 5p per mile for business journeys fully electric company cars.

If a business installs charging points at its premises the use of the electric charge points by an employee is tax free. This can be a useful way for a business owner to extract value from the business tax free.

When a charging point is used at a motorway service station the cost of this can be reinbursed.

If the electric vehicle a leased car then the full cost of the lease is allowable, where as where a vehicle has co2 emissions of over 50g km the cost of the lease is restricted for corporation tax purposes.

Do hybrid cars have the same tax benefits as electric only cars?

No, whilst hybrid vehicles are low emission vehicles they do not enjoy the same tax benefits as fully electric company cars. The taxable benefit of a plug in hybrid electric vehicles are based on their co2 emissions and their electric range.

If the co2 emissions of electric hybrids is below 50g km then there is a reduction to the ‘appropriate percentage’ based on the electric only range. Therefore the taxable benefit will be a lot less.

Hybrid cars do not also qualifying for first year allowances, a business can claim capital allowances for the cost of the vehicle but at a reduced rate.

Where an employer pays for private fuel, there is also fuel benefit in kind on electric hybrids depending on the electric range and Co2 emissions ideally being below 50g km.

FAQs

Do Tesla cars pay road tax?

As with all electric vehicles they are currently exempt from road tax.

Do you pay luxury car tax on electric cars?

There is no ‘luxury car tax’ on electric vehicles.

Is it worth it to get an electric car?

Electric cars certainly have a lot more tax advantages and can be a great way to extract value out of a business. However, these need to be considered against the practical implications.

What if I use my own electric vehicle for work?

Privately owned electric cars are treated the same as all private vehicles, where an employees use their own electric vehicles for business journeys then the mileage is reimbursed to the employee.

Can I convert my classic car to electric through the business?

Classic cars are taxed differently to normal cars. Where a car is over 15 years old and the market value is more than it’s list price HMRC deem this to be a classic car. If the market value is less than £15,000 then the taxable benefit in kind in based on the list price and not the market value.

Where a classic car is converted to electric once the DVLA have confirmed that it has zero co2 emissions then the car enjoys all the tax benefits of all battery electric vehicles.

Conclusion

Fully electric company cars are significantly more tax efficient than traditional fully fuel powered cars. It can be a great way to extract value out of a business however it is worthwhile considering the practicalities such as availability of charging facilities and the electric range when making the decision to move over to fully electric company cars.

Hybrids with co2 emissions below 50g km and longer electric only range can prove to be a more practical solution but there are additional tax implications to consider using this option.

We would always recommend taking advice to your specific circumstances before making the decision. Contact us today.

*disclaimer: all tax rates and prices are as in effect on 23rd May 2022.

Carrie Stokes Chartered Accountant

Carrie Stokes Chartered Accountant

I work with directors of limited companies in Shropshire, Staffordshire and the West Midlands giving them a clear and up to date financial picture of their business that they understand. Looking at the numbers, what they mean and how they can be improved to grow their business.

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