Sustainable transport: are ‘friends’ electric?

In November 2022, data from the Society of Motor Manufacturers and Traders showed that one in four new cars sold that month were plug-in (that figure includes hybrid cars), and that the year-to-date figures for pure battery cars shows they made up 15% of all new car sales.

But does this recent swing indicate that offering an electric car as a company vehicle 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 and electric cars are just one step in that direction. But it also helps that a much wider range of models is now on the market, over a much wider spread of price points. This said, still one key worry remains for drivers – the range of electric cars.

The move to zero emissions 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 – very substantial tax benefits can be had by all if an employee is happy to use an all-electric car with zero-emissions rather than a diesel, petrol or hybrid company car.

She said: “The two biggest benefits are the upfront tax reliefs on purchase for the employer and the vastly reduced benefit-in-kind costs, which primarily – but not exclusively – help the employee.”

Capital allowances

Helen explains employers who purchase cars that 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). She added: “Under WDAs, 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 continued: “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, Helen points out that a business purchasing a new electric car by 31 March 2025 is entitled to claim 100% first-year allowances. This means the full cost can be offset against taxable profits in the year of purchase.

Typically, catches exist though. Helen said: “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.” That said, she says potential nevertheless exists for a sizeable cash flow benefit in the first year of ownership.

However, regardless of whether the car is electric, the VAT position is the same – it is not recoverable on the purchase of a car where private use is involved 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, Helen said: “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 only 2% this year (2022-23) – a rate that will be held until 2024-25”.

While the benefit charge is set to increase by 1% a year from 2025-26 to 5% by 2027-28, an electric car remains an attractive proposition.

In practical terms, 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, Helen says employers do so too, as the reduced benefit in kind also results in Class 1A savings for employers. On why this was, she said: “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”. Class 1A rates have varied during the past year, but will return to 13.8% from April 2023.

A note for the future, however. The 2022 Autumn Statement announced new zero-emission cars registered on or after 1 April 2025 will be liable to pay the lowest first-year rate of vehicle excise duty – car tax z (which applies to vehicles with CO2 emissions 1g/km to 50g/km), currently £10 a year. From the second year of registration onwards, they will move to the standard rate, currently £165 a year.

Charging

Of course, electric cars need power and this presents two more issues to overcome – the cost of installing the charging point and the cost of the electricity itself.

It is possible to charge an electric car from a 13-amp mains plug. But it is far quicker – and safer – to charge via a dedicated charge point. Fortunately, Government largesse covers charging, too for. Helen said: “There are further favourable tax provisions available where employers are prepared to install facilities to charge the car whether at the employee’s home, at work or both.”

Charging at home

The logical place to charge an employee’s car is at home. Here, Helen advises 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 until March 2025 they will be able to claim first-year allowances.

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 (since December 2022) for an electric car is 8p/mile. But 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.

This, Helen says, is still better than the position for providing petrol or diesel fuel to a company car, where the benefit in kind here is a high, flat rate charge if an employee is provided with any fuel for personal journeys, however small. As this can become very expensive, the issue for diesel/petrol cars is generally avoided by asking employees to reimburse the costs of private mileage, or alternatively, have them pay for all fuel themselves and only claim for business mileage.

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 and so wants more charging facilities at workplaces. 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, 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. 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”.

Charging out and about

Charging a vehicle when out and about is more complex, physically, but the rules are reasonably simple. Helen said: “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, as of 1 December 2022, was 8p/mile. Employers can reimburse higher costs, but only if they can be evidenced and agreed with HMRC.

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, change is coming and firms taking 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.