The future is green…

Peter Rayney reviews the tax efficiency of electric company cars and other eco-friendly vehicles. 

As we emerge from the Covid pandemic, there is even greater focus on the Green agenda. The government aims to ban petrol, diesel and many types of hybrid car by 2040. To provide fiscal encouragement to make the ‘switch’ to electric, there are tremendous tax breaks for electric vehicles and this looks likely to continue for the foreseeable future.  

For all these reasons, there has been a marked uptake in the provision of eco-friendly ‘company’ cars, with tax now becoming the main driver in the choice of car. 

Electric cars: Tax breaks for employees 

A taxable benefit in kind (BIK) arises normally where employers provide directors/employees with a company car which is available for private use. The BIK charge generally depends on the car’s list price when new (including its battery), its carbon dioxide (CO2) emissions and its registration date. Furthermore, the employer is liable to a Class 1A National Insurance contributions (NICs) charge on the same BIK figure. 

However, fully electric cars (i.e. ‘plug in’ cars with electric driving only) offer zero or negligible BIK tax charges. For 2020/21, all electric cars have a zero BIK charge, which means that they are completely exempt from tax/NICs. Furthermore, they will only have a 1% BIK rate in 2021/22, rising to just 2% in 2022/23. The extremely low BIK rates compare very favourably with the 37% rate for traditional cars at the top end of the CO2 emission bandings. 

Example: Taxable benefit on electric car 

Handforth UK Ltd purchased an Electric Mini Cooper car on 6 July 2020 with a list price of £30,250. The Mini was purchased for the use of the company’s managing director, Jackie Weaver, and is made available for her private use. 

Jackie has no taxable BIK for 2020/21 and her taxable BIK for 2021/22 is only £303 (i.e. £30,250 x 1%). 

Cost of electric charging and mileage rates 

The legislation excludes electricity from the definition of fuel (ITEPA 2003, s 149(4)). Consequently, electric cars do not attract any fuel benefit charge. ITEPA 2003, s 237A provides a specific BIK exemption where the car is charged at or near the workplace. This exemption applies where the charging facility is generally available and no account is taken of the private mileage undertaken.  

Because of the wide ambit of the ‘electricity’ exclusion in ITEPA 2003, s 149(4), which covers any ‘facility or means for supplying electrical energy’, it is considered that no taxable BIK charge should arise where an employer meets the cost of an electric car ‘charge card’ or pays for a charging point at an employee’s home.  

Since September 2018, the reimbursement for business mileage payments on electric cars has been made easier. Therefore, where employees meet the electricity cost of business travel, their employer can reimburse them up to (currently) 4p per mile (the advisory electric rate (AER)) for business mileage. Thus, for example, where a director travels 6,000 business miles in an electric car, they can receive a tax-free AER reimbursement of £240 (i.e. 6,000 miles x 4p).  

It is possible for reimbursement to be made at a higher rate than the 4p AER, but this would result in a taxable benefit equal to the excess amount over the 4p per mile AER. This rule is subject to one important exception; an employer can pay a higher amount than the AER (without a tax charge arising) if it can be shown that the actual electricity cost incurred is higher. 

Electric cars are generally exempt from congestion charges and those purchased for less than £40,000 are also exempt from road tax. 

Capital allowances on electric cars  

From the business viewpoint, the purchase cost of new and unused electric cars are currently eligible for 100% first year allowances (FYAs) in the year the expenditure is incurred (the 100% FYA is extended to April 2025).  

Following the Budget 2021 proposals, at the time of writing it is not yet clear whether (from 1 April 2021) electric cars would qualify for the 130% super-deduction. While electric and low emission cars do not fall within General Exclusion 2 in CAA 2001, s 46, it is possible that this ‘let-out’ may not apply for the purposes of the ‘super-deduction’ rules.  

Businesses may claim less than the full 100% FYA. In such cases, the balance of unclaimed expenditure will flow into the main pool and qualify for future writing down allowances (WDAs) at the rate of 18% per year. It is perhaps worth noting that no annual investment allowances are available for any type of car. A second-hand electric car would qualify for WDAs at the main pool rate. 

The running costs of the car (including those relating to the employee’s private use) are fully deductible against the business profits for tax purposes. 

Where the electric car is leased (instead of being purchased), the full annual lease cost flowing through the company’s profit and loss account would be deductible – the 15% disallowance for high-emission vehicles would not apply.  

Hybrid company cars 

There are many types of hybrid car, which typically use two sources of energy; electrical energy stored in batteries, with the combustion energy supplied by petrol/diesel fuel. With a conventional hybrid, the battery is invariably recharged by the engine. Plug-in hybrid cars are recharged by connecting to an electrical charging source. 

The provision of hybrid company cars follows the normal taxable BIK rules. However, the BIK charging rates for hybrids are relatively attractive compared to traditional petrol/diesel powered cars.  

The scale rates for hybrid (petrol-driven) company cars with CO2 emissions below 50 g/km are shown below: 

* Same rates to apply in 2022/23 
** Rate increases by 1% in each band in 2022/23 

It will be seen that the tax-efficiency of a hybrid largely will largely depend on its pure electric driving range (the maximum distance the car can be driven in electric mode without recharging the battery). Electric car users also have certainty since the BIK rates are destined to remain at 2022/23 levels until 2025.   

Capital allowances on hybrid cars  

The rate of capital allowances available for hybrid cars is based on their CO2 emissions but the rules have changed from 1 April 2021, as set out below.  

From 1 April 2021, only zero emission hybrid cars qualify for 100% FYAs in the year of purchase. It is currently uncertain whether they would benefit from the 130% super-deduction announced in Budget 2021 (see above).  

Hybrids with a CO2 emission range below 50g/km qualify for 18% annual WDAs (reducing balance basis) in the main capital allowances pool. Less eco-friendly hybrids with CO2 emissions above 50g/km only attract 6% annual WDAs (reducing balance) in the special pool. 

Fuel charges and mileage rates for hybrid cars 

Employees provided with hybrid company car are subject to the normal company car fuel benefit rules where private motoring is allowed. No special allowance is given for the car’s ability to be run on electricity, although the scale percentages are likely to be lower. 

Therefore, for 2020/21, the fuel benefit charge is calculated by reference to a base figure of £24,500 against which the relevant percentage (from the above hybrid ‘car benefit’ table) is applied.  

A fuel charge benefit can only be avoided if the full cost of the private fuel for the relevant tax year is reimbursed. There is no HMRC guidance about the concept of ‘making good in full’ in the context of a hybrid car. However, there is a general consensus that the amount ‘made good’ should be based on the total petrol costs (ignoring electricity) incurred for private journeys. The deadline for making good private fuel is 6 July following the end of the tax year. 

Practical tip  

It is now clear that the massive tax breaks available on electric and hybrid cars are now making them a very popular choice with company directors and employees. They should therefore always be seriously considered in company car purchasing or leasing decisions.