With every manufacturer’s announcement, the availability of electric cars is increasing.
For some the move away from oil is about saving the planet. Others think of running costs. But for many it’s about utilising the significant tax advantages enjoyed by both employers and employees who are prepared to make the switch.
And the data shows the rate of growth. In 2021, more pure-electric cars were sold than in the whole of the previous five years, according to figures published at the start of January (2022) from Society of Motor Manufacturers and Traders (SMMT). As a result, overall sales of cars that can be plugged in rose to 18.5% of all the cars sold in 2021
But does this recent swing indicate that offering an electric car as a company car is now more desirable than perhaps it has been in the past?
In answer, employers might be looking towards ways of reducing the carbon footprint of their business, either on their own initiative or as a result of pressure from employees, and electric cars are just one step in that direction. But it also helps that there is now a much wider range of models on the market over a much wider spread of price points. This said, there is still one key worry for drivers – the range of electric cars. Thankfully, some can travel 300-400 miles on a single charge, and Mercedes recently demonstrated a vehicle, the EQXX, that can cover around 600 miles on a charge, albeit with denser batteries and a slower top speed. It helps too that there are grants available to help with the costs of both purchase of the vehicle and installation of charging points.
The move to zero-emission has also been given a push by the government which committed, in its ‘10-point plan for a green industrial revolution’, to phase out diesel and petrol cars by 2030, and hybrid vehicles by 2035.
But for Helen Thornley, a technical officer at the Association of Taxation Technicians, a professional taxation body, there can be very substantial tax benefits for all if an employee is happy to use an all-electric car with zero-emissions rather than a diesel, petrol or hybrid company car – provided that all the practicalities work out. And she says that “the two biggest benefits are the upfront tax relief on purchase for the employer, and the vastly reduced benefit in kind costs, which primarily – but not exclusively – help the employee”.
Capital allowances
On to the first, Thornley explains that employers who purchase cars which employees can use privately are generally only able to obtain tax relief for the cost quite slowly under the system of writing down allowances (WDAs). “Under WDAs,” says Thornley, “a proportion of the cost of the car can be offset against profits each year. For very low emission cars which emit 50g/km or less this percentage is 18%, but this drops to 6% for vehicles with higher emissions.
“Moreover,” she continues, “WDAs are not given on a straight-line basis, but on a reducing balance basis.” This means that for a regular car, the business can claim 6% of the cost in year one, then 6% of the unrelieved cost in year two and so on – so it can be many years before the full cost of the vehicle is written off.
In contrast, Thornley points out that a business purchasing a new electric car by 31 March 2025 is entitled to claim 100% first year allowances; this means that the full cost can be offset against taxable profits in the year of purchase.
Typically, there are catches though notes Thornley: “Employers must have sufficient profits to benefit from such a write off, and there may be a sting in the tail later on when the car is sold and some of that relief is clawed back.”
At this point Thornley says that regardless of whether or not the car is electric, “the VAT position is the same – it is not recoverable on the purchase of a car where there will be private use by an employee”.
Benefits in kind
The next issue to consider is one that is particularly high on employees’ radar: that a company car is often an expensive perk as they are taxed on the cash equivalent value of the vehicle which is calculated as a percentage of the car’s list price.
Referring to the nitty-gritty of the tax, Thornley tells how “the percentage for conventional combustion engines varies depending on the car’s emissions and can go as high as 37% for the most polluting options. However, for a zero-emission electric car, the current percentage to apply to the list price, which must include the cost of the battery, is as little as 1% this year (2021/22).” She adds that while the benefit charge is set to double in 2022/23, 2% remains a very attractive proposition and that percentage figure is set to remain until 2024/25.
In practical terms, Thornley says that mathematically, for a £28,000 car, which is roughly the list price of something like a Nissan Leaf, “the benefit in kind for 2022/23 is only £560, which means a higher-rate 40% employee who uses the car privately would only pay £224 in income tax for private use of the car for the whole of 2022/23.”
But while employees benefit from going electric, Thornley says that employers do so too as the reduced benefit in kind also results in Class 1A savings for employers. This is because, she says, “employers pay Class 1A on the cash equivalent of the benefit in kind, so the lower that cash equivalent, the lower the Class 1A cost”. And this is especially relevant, according to Thornley, as Class 1A rates will be increasing from 13.8% to 15.05% on 6 April 2022 in anticipation of the introduction of the Health and Social Care Levy the following year.
Charging
Of course, electric cars need power, and this presents two more issues – the cost of installing the charging point, and the cost of the electricity itself.
It is possible to charge an electric car off the mains from a 13-amp plug. But it is far quicker – and safer – to charge via dedicated charge points. Fortunately, government largesse covers charging too. “There are,” says Thornley, “further favourable tax provisions available where employers are prepared to install facilities to charge the car either at the employee’s home, at work or both.”
This, she says, contrasts to the position for providing petrol or diesel fuel to a company car, where a benefit in kind will result if an employee is permitted to use any such fuel for personal journeys.
Charging at home
The logical place to charge an employee’s car is at home. Here Thornley advises that employers providing a company car “can also pay to install a dedicated charge point at the employee’s home at the same time without creating a benefit in kind for the employee”. Again, the employer won’t be able to recover VAT costs on the equipment, but Thornley says that until March 2025 they will be able to claim first-year allowances.
Tax law is complex and Thornley warns that despite the allowances on charging point installation, electricity needs to be considered separately; the allowance “only applies when the charging point is provided in conjunction with a company car”. This means that “if an employer paid for a charging point to be installed at the home of an employee who had their own personal electric car, this would be a benefit in kind”.
Notably, employees paying for electricity as part of their household bills can seek reimbursement from the employer for business miles; where the reimbursement is only for business mileage then the current advisory fuel rate for an electric car is 5p/mile. But Thornley warns that “if the employer is generous and also pays for the costs of charging for personal mileage in addition to business mileage, then any reimbursement relating to private travel will be taxable on the employee”.
Charging at work
While charging at home is logical, it’s just as likely to be done at work. The government is understandably keen to encourage the use of more electric cars in the workplace and so wants more charging facilities at work. As a result, employers can claim 100% first-year allowances on the cost of installing electric charging equipment at their premises – but only until March 2025.
Thankfully, as Thornley points out, “employees using charging facilities made available to them by their employer at or near the workplace will not be subject to a benefit in kind”. She adds that this applies to not just those charging their company cars, but to anyone – provided the facilities are made available to all employees, or at least all employees working at that site.
Interestingly, she highlights that “this generous exemption from benefit in kind tax applies even if they go on to use that charge for personal travel”. She clarifies further: “The employee doesn’t even need to arrive in their own car – if they car share with another individual who owns the electric car, that car can be charged at the first employee’s workplace without tax consequences as long as the employee was a passenger or driver of the car.”
Charging out and about
Charging a vehicle when out and about is more complex, physically, but the rules are reasonably simple, says Thornley: “If a company car is charged while away from the office and the charge used for business miles, then the employer can reimburse the employee for the cost of the business miles travelled at the Advisory Fuel Rate for electric cars.” The rates are published quarterly which, from 1 December 2021, is 5p/mile. Employers can reimburse higher costs, but only if they can be evidenced and are agreed with HMRC.
Beyond that, employers can also provide charge cards for those using electric company cars to a value of up to £100 per year. Doing this allows drivers unlimited access to local authority or commercial vehicle charging points where a membership card is needed before charging can commence.
Electric vans
Much has been mentioned of electric cars, but what of electric vans?
The situation, says Thornley, is similar albeit that the tax position for vans is altogether more favourable to start with.
She says that an electric van will qualify for 100% first-year allowances until 2025, but this is less likely to be relevant given vans already qualify for the Annual Investment Allowance; and “for some companies, the enhanced deductions from the super-deduction which allows enhanced tax relief on qualifying assets for companies until 31 March 2023 may be more relevant”, The practicalities of Thornley’s observation is that qualifying vans will, with the super-deduction, take 130% of their value off a corporation tax bill.
Lastly, on the benefit in kind, since 1 April 2021, electric vans have seen this zero-rated. But, as Thornley comments, “vans already had a favourable benefit in kind regime so the switch to electric may not create any savings unless the employee has significant private use of the vehicle”.
In summary
Like it or not, zero-emission vehicles are coming. While it’s uncertain which technologies will last the course, in the short to medium term, electric is dominant. But regardless, firms that take advantage of the current tax-based regimes may be able to make large savings for themselves and their staff – all while helping to protect the environment.
CASE STUDY: The Kingston Carton Company
Mark Wilson, head of purchasing at the Kingston Carton Company, says that the company decided to give colleagues the option of switching to plug-in hybrid and/or fully electric vehicles from the start of 2021. He explains that “as a company we are always looking at ways in which we can improve our environmental policies, and a switch to plug-in hybrid vehicles was wholly welcomed by our colleagues”.
In practical terms, the Hull company runs a fleet of plug-in hybrid vehicles and one fully electric vehicle.
Wilson recognised that the restriction on range, coupled with the availability of public charging points were limiting factors in moving to a completely electric fleet. However, as he says, “it is clear to us that electric vehicles are the future of transport and the infrastructure must be in place to support this shift”.
As for running costs, Wilson notes that the cost of traditional fuels such as diesel and petrol are at an all-time high as is the cost of electricity.
He points out though, that “in terms of upfront costs, plug-in hybrid and electric cars generally cost more, therefore capital expenditure is higher”. He adds that there are pros and cons for both combustion and electric cars in terms of cost, but “the ‘greener’ credentials of the plug-in hybrid and electric cars was the ultimate determining factor”.
On the matter of capital allowances and benefits in kind, Wilson says that no external advice was taken, and all legislation was evaluated internally. Nevertheless, he says that “as with all business decisions it is important to understand any financial impacts that such a change can have on both the business and its employees”. He encourages the government to “continually support companies that want to make environmentally beneficial changes”.
It’s interesting to hear that from the outset staff welcomed the option of plug-in hybrid and electric vehicles; the company now has five electric charging points which are available to customers, suppliers and staff alike.
In summarising, Wilson comments that his company offers “one of the most environmentally friendly forms of packaging in terms of cardboard”. However, he says that it is also important to show that “we consider the environment in all aspects of our business, which includes the move to plug-in hybrid/electric vehicles”.
