Katie De Niese, Tax Manager at Streets Chartered Accountants, dives into the tax implications for electric company cars.
The electric car market is growing quickly, with more than 245,000 pure-electric cars on UK roads at the end of April 2021 and over 515,000 plug-in models (including plug-in hybrids). More than half of all cars are registered to UK businesses on UK roads.
Last year saw the biggest annual increase in number of registrations, with more than 175,000 electric vehicles registered showing a growth of 66% on 2019. This increase could be as a result of any number of factors, social responsibility, increase in mileage range, or indeed Company Car Tax incentives offered by the Government.
Are electric cars exempt from Company Car Tax?
This is a common misconception and one that is easily made. In April 2020, the Benefit In Kind (BIK) rate applying to hybrid cars with Co2 of less than 50 and pure electric cars with a mileage range of over 130, was reduced to zero. This means that for the 2020/2021 tax year, if a car meeting this criteria was provided to an employee, then there would be no Income Tax Liability for the employee and no National Insurance Liability for the employer. Some may call this a ‘win win’ scenario. The benefit isn’t exempt, a rate of 0% simply applied for this tax year alone.
For 2021/2022 the rate increases to 1% and for 2022/2023 increases to 2%. By any standards, these rates are exceptionally low. H M Revenue & Customs also offer beneficially lower fuel benefits for hybrid company car users.
There are a number of rates that apply to both hybrid and pure electric cars that don’t meet these criteria, and on the whole these rates are lower than that of petrol or diesel cars.
How is the capital cost of the electric company car treated in the Accounts?
For cars with an emissions rate of 50g/km or less, a 100% first year capital allowance is available. Some hybrid cars will also fall into this category. Contrast this with cars that fall into the emissions bracket over 50g/km and not exceeding 110g/km, where an 18% annual “writing down allowance” is available. After four years of ownership, just under 55% of the cost will have received tax relief.
Even slower tax relief is obtained where the emissions rate exceeds 110g/km. The annual writing down allowance for these cars is reduced to just 6% per annum. In this case, only 22% of the cost will have received tax relief after four years.
Is now the time to purchase electric cars for your company cars?
Whilst we don’t at present know the BIK rate or Capital Allowance treatment that will apply to electric cars after 2022/2023 it is highly likely that the rates will be significantly lower than that of petrol/diesel cars.
In recent years it has, in a large number of cases, become more beneficial to stop providing company cars and for employees to use their own cars for business travel, seeing the number of company car users drop significantly.
The introduction of the new rules gives a great opportunity to provide company cars again, at little cost to both the employee and the employer – a benefit which is usually held in high regard by employees. The employer can also regain some control as to what cars ‘represent’ the business name and also ensure that the cars are maintained correctly.