Tax implications for electric cars

Electric vehicles (EVs) have gained considerable momentum in recent years, prompting governments worldwide to adopt supportive policies. In the UK, the government has set ambitious targets for transitioning to electric mobility, including a ban on the sale of new petrol and diesel cars by 2035.

Benefit in kind (P11D)

The inclusion of electric cars within the P11D scheme aligns with the government's objectives of reducing carbon emissions and promoting sustainable transportation options.

Employees are required to pay income tax on any benefits that they receive from their employer. The benefit in kind for company cars is calculated based on the car's C02 emissions and the list price of the vehicle. From 6 April 2020, the benefit in kind for fully electric cars is being reduced to 0% for the tax year 2020-2021, increasing to 1% in 2021-2022 and 2% in 2022-2023 of an EV’s taxable list price.

The government announced in November 2022 that the 2% rate of electric vehicles is set until April 2025, after which it will be:

• 2025/2026 = 3% BIK
• 2026/2027 = 4% BIK
• 2027/2028 = 5% BIK

There are no fuel scale charges applied to fully electric cars as electricity is not a fuel. For reimbursement of mileage, an approved electricity rate for 2022-23 is:

These rates are published under Advisory Fuel Rates on Gov.UK.

There are also tax advantages if you provide your employee with charging facilities at your workplace, and even for the installation of a vehicle charging point at the employee’s home.

For further guidance on the tax treatment of charging and mileage payments due to an employee using a fully electric vehicle, see HMRC guidance within EIM23900.

VAT on electric cars

It is a common misunderstanding that VAT is recoverable on the purchase of electric cars. All cars are treated the same for VAT purposes whether they are electric cars or hybrid or petrol or diesel.

HMRC VAT Notice 700/64 guidance applies equally to outright purchases, hire and lease purchase, personal contract purchases and contract hire. As a general rule, you cannot recover the VAT on the purchase unless the car:

• is a stock in trade of a motor manufacturer or dealer
• is intended to be used primarily as a taxi, driving instruction car, or self-drive hire
• will be used exclusively for the purposes of your business and would not be made available for the private use of anyone.

With regard to fuel costs, if a business pays an employee a mileage allowance, whereby VAT is recoverable on the fuel element of that mileage allowance, HMRC has published a 4p per mile rate for electric cars in their advisory fuel rate table. Hybrid cars are treated as either petrol or diesel cars for this purpose.

HMRC guidance clearly states that if you lease a ‘qualifying car’ for business purposes you cannot normally recover 50% of the VAT charged. The 50% block is to cover the private use of the car. You can reclaim the remaining 50% of the VAT charged, subject to the normal rules.

Capital allowances on electric cars

The Finance (No. 2) Act 2017 introduced measures to incentivise the adoption of ultra-low emission vehicles, including electric cars, through favourable capital allowances.

Capital allowances: sole traders, partnerships and companies

• From April 2021 electric vehicles are eligible for 100% first-year capital allowances.
  • as they are allocated to the main pool and not separate pools (assuming no private use) there may not be a balancing charge on disposal.
• The 130% Super-deduction available for companies between April 2021 and March 2023 does not apply to electric cars but does apply to commercial vehicles which would be eligible for plant and machinery allowances such as vans, lorries, tractors and taxis.
• Electric vehicle charging points are eligible for 100% allowances. The private use element should not be overlooked here as this may lead to the asset having to be separately pooled for CA purposes.

Useful resources

ACCA technical factsheet: Treatment of benefits in kind – P11D guidance

HMRC manual EIM23900