Over the past few years there have been significant increases in the tax charges for directors and employees who have been provided with company cars. We are now at the point where this benefit is no longer as attractive as it once was, especially for normally aspirated cars.
The exception to this is electric cars where the tax treatment has been through a roller coaster over the past few years. These vehicles started by being a very attractive option from a tax perspective, but at the same time unattractive in terms of the ability of the vehicles. The tax position then worsened considerably each year until 5 April 2020, at which point the benefit in kind reverted to extremely attractive. This has coincided with a huge increase in practical and desirable electric cars meaning that these are now being considered as genuine possibilities.
For the 2020-21 tax year, fully electric cars had a zero benefit in kind percentage meaning no personal tax liability at all. The rate for the current year is just 1% of original list price (plus the cost of any accessories). From 6 April 2022, this will increase again to 2%, but this still means an extremely low tax bill on the provision of an electric company car.
Should an electric car be taken as a company car or purchased privately?
Assuming the costs are the same regardless of whether supplied by the company or acquired personally, there is absolutely no doubt that this is a valuable benefit in kind and considerably cheaper to be supplied as a company car rather than acquired by the individual. The tax position for the company is very attractive in comparison to normally aspirated cars because of advantageous tax treatment. These vehicles are also very attractive from a company car fuel perspective as well as the fact that HM Revenue & Customs do not class electricity as a fuel. Therefore, no company car fuel benefit applies to a fully electric car.
Another advantage is that low emission cars are exempt from the Optional Remuneration Arrangements (OpRA or salary sacrifice) legislation and therefore do not suffer excessive tax charges when you combine salary sacrifice with the provision of an electric company car.
In conclusion, it is usually extremely advantageous for an employee to salary sacrifice in return for an electric company car in comparison to acquiring a new electric car personally. The salary sacrifice can ensure that the switch from salary to electric company car result in savings for the employer as well, or at worst leave the employer in a neutral position depending on the arrangements agreed with the employee.
Lease or outright purchase?
The most cost-effective method of acquisition by the business is usually the outright purchase of a new electric car as this can qualify for 100% first year allowances for capital allowance purposes. However, this does present a challenge in calculating the salary sacrifice requirement from the individual to leave the business in a neutral position because there is uncertainty about resale values, etc. If you do not know how much the vehicle will depreciate by, there will be an element of guesswork when deciding how much salary should be given up in exchange for the vehicle. Not usually a problem for the business owners, but this can be an issue when the vehicle is provided to others. For practical reasons, it may therefore be preferable to lease the vehicle so you have more certainty over the actual costs the business will suffer.
The employer is able to provide a charging point at the employee’s home, without a taxable benefit arising, thus allowing the car to be charged overnight. The business can also install charging points at the workplace, again without taxable benefits arising.
The VAT treatment of an electric car is the same as any other car. VAT cannot normally be reclaimed on the purchase or a lease purchase agreement but 50% can be reclaimed on the lease cost. Businesses should still be able to recover VAT on servicing costs and running costs of electric cars with the normal restrictions for any private use. If businesses are used to paying staff an amount per mile, consideration will need to be given to how much VAT can be recovered (domestic electricity is normally charged at 5% but HMRC have stated that charging points should be charging VAT at 20%) as well as any receipts needed. Currently there is little official guidance in this area.
Clearly tax advantages are very desirable, but ultimately the vehicle has to be fit for purpose. Therefore, you should first consider whether the vehicle is practical for intended use before choosing one. The key questions are likely to be:
- Is there somewhere to charge the vehicle?
- Is the range of the vehicle sufficient for intended purpose?
- Is the cost too high?
- Most importantly, is this the right car for me?
If the conclusion is that an electric car ticks all the right boxes then this should represent a considerable saving in comparison to a normally aspirated company car. It should also be cheaper to take this as a company car with salary sacrifice rather than financing for personal ownership.
Alternatively, if the conclusion is that a fully electric car is impractical, maybe a hybrid car is the solution. These are unlikely to be as attractive as a fully electric vehicle from a tax perspective, but some are still a very attractive option. The chargeable percentage applied to a hybrid car is based on the range of the electric motor with the greater the range resulting in a lower percentage applied to the original list price (plus the cost of extras).
Hybrid cars do not however escape the company car fuel charge and therefore it is usually unattractive for the business to meet the cost of any private fuel in a company car that is not fully electric.
How can Menzies help?
Menzies can help you to understand the tax position and true cost from both business and individual perspectives enabling you to make informed decisions and the best option for you.