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Tax on company cars: Does it now pay to go electric with your fleet?

Posted by
Rouse Partners
29.09.2020

It isn’t just the progression in technology and infrastructure that is driving more companies to consider part or fully electric fleets. There are now significant taxable benefits which we discuss in this article.

Company cars a liability?

When it comes to offering your staff company cars, the common drawback is that often they create more personal tax liability than they save on the company’s corporation tax bill, meaning many employees choose to opt out of having one altogether.

This is because employees taking company cars are liable to pay ‘Benefit in Kind’ (BiK) tax to reflect the monetary value of this perk.

Whilst this varies depending on the vehicle, it can be more cost-effective for employees to use their own car and claim back the mileage instead.

This has meant dwindling take-up and companies missing out on the benefits of offering company cars, namely attracting employees, deductible repair and maintenance expenses, capital allowance reliefs and reclaiming VAT (if purchasing), branding and reputation enhancement.

…but now pure electric cars pay no company car tax

This tax year (from 6 April 2020) we have seen the introduction of tax exemptions on electric and low emission vehicles which is increasing the popularity of electric company cars.

From 6 April 2020 until 5 April 2021, full battery electric vehicles (BEVs) will pay no Benefit in Kind rate. This compares to 37% at the opposite end of the emissions scale.

This 0% rate also applies to company car drivers in pure electric vehicles registered prior to April 6, 2020. Additionally, the 0% rate will also apply to company cars registered after April 6, 2020, with emissions from 1-50g/km and which have an electric mile range of 130 miles or more. Both will increase to 1% in 2021/22 and 2% in 2022/23.

The table below shows the Benefit in Kind rates for vehicles with less than 50 g/km CO2 emissions before and after 6 April 2020 including Electric, Petrol and RDE2 Diesel.

Vehicle CO2 emissions BiK rate for cars registered before 6 April 2020 BiK rate for cars registered after 6 April 2020
2019-20 2020-21 2021-22 2022-23 2019-20 2020-21 2021-22 2022-23
0 g/km 16% 0% 1% 2% n/a 0% 1% 2%
1-50 g/km (electric range >130 miles) 16% 2% 2% 2% n/a 0% 1% 2%
1-50 g/km (electric range 70-129 miles) 16% 5% 5% 5% n/a 3% 4% 5%
1-50 g/km (electric range 40-69 miles) 16% 8% 8% 8% n/a 6% 7% 8%
1-50 g/km (electric range 30-39 miles) 16% 12% 12% 12% n/a 10% 11% 12%
1-50 g/km (electric range <30 miles) 16% 14% 14% 14% n/a 12% 13% 14%

Benefits in Kind Comparison: Electric vs Petrol

We thought that it would be useful to show an example of how the above rates work in practice. The below example is based on a higher rate taxpayer buying an electric Tesla Model S versus a petrol Mercedes S 450 after April 2020.

Vehicle Tesla Model S Performance Mercedes S 450 L AMG Line
P11D Value (approximate list price at the time of writing (23/09/2019) with no separate delivery fee £90,000 £90,000
Emissions 0 gCO2 /km 169 gCO2 /km
2020-21 monthly BiK cost @40% tax rate £0 per month
(@0% BiK rate)
£1,100.00 per month
(@37% BiK rate)
2021-22 monthly BiK cost @40% tax rate £30.00 per month
(@1% BiK rate)
£1,100.00 per month
(@37% BiK rate)
2022-23 monthly BiK cost @40% tax rate £60.00 per month
(@2% BiK rate)
£1,100.00 per month
(@37% BiK rate)

…and further reliefs available for companies who purchase rather than lease their fleet

Whilst cars do not qualify for the annual investment allowance (AIA), the cost of acquiring any commercial vehicles can be claimed under the AIA, so it is important to determine whether a vehicle qualifies as a commercial vehicle for tax purposes. The AIA cap is £1m for purchases made in 2020, and will revert to £200,000 on 1 January 2021.

For companies planning to purchase rather than lease their fleet there is also the added benefit that they qualify for a 100% first-year allowance (FYA) if CO2 emissions do not exceed 50g/km and the car is purchased new and unused (as per section 45D of the Capital Allowances Act 2001 (CAA 2001)).

This effectively gives full tax relief to companies on the cost of the car in the year of its purchase and means that a £35,000 investment in an electric vehicle would yield a £7,000 saving in tax relief for your company.

There are also other benefits of ‘going green’ (including reduced road tax, being exempt from the Ultra Low Emission Zone (ULEZ) and congestion charges and a Plug-in Grant of up to £3,500), so it is not hard to see why companies are beginning to look at electric car as a viable option for their fleet.

What about company vans?

A similar 100% FYA applies for zero emission vans, where the vehicle is purchased new and unused before 1 April 2021, or 5 April 2021 for income tax (as per section 45DA of the CAA 2001). However, as all commercial vehicles already qualify for 100% relief under the Annual Investment Allowance (AIA), this special FYA for zero emission goods vehicles is not needed by the majority of businesses.

Furthermore, there are government grants available, including the Plug-in Van Grant worth up to 20% towards the purchase price up to £8,000.

There is further information available on the Plug-in Grant for cars and vans on the .Gov website.

Concerns about going electric

Some of the key concerns of moving to an electric fleet include range, charging and purchase cost. Whilst these have been improving in recent months, it is worth exploring the specifications of your chosen vehicles in more detail with the retailer or leasing company.

Contact us

Our tax team provides a full range of tax planning advisory services for businesses and individuals. We also provide a P11D service to look after your reporting of staff Benefits in Kind.

Please contact us to discuss your requirements and for a quotation.

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This information has been produced by Rouse Partners LLP for general interest. No responsibility for loss occasioned to any person acting or refraining from action as a result of this information is accepted by Rouse Partners LLP. In all cases appropriate advice should be sought before making a decision.

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