Time for a new car? Own your own company? Maybe it’s time to consider buying (or leasing) an electric vehicle (EV) through your company.
Even although the tax benefits of an electric vehicle against an internal combustion engined car have been around for a while and are well known to most, because of the high cost to buy, and the disappointing choice available, I’ve tended to shy away from them. However, now that choice is greater, and as a consequence, the prices are coming down, is it time to revisit the electric vehicle arguments? We think so.
Price differences
It’s important to note that, even although EV prices are coming down, they are still more expensive than their ICE counterparts. Here’s a couple of examples:
A Peugeot 2008 GT petrol model costs £31,170. The electric equivalent is £40,700.
The BMW X2 Sport diesel is £41,110 on the road. The nearest electric model is £57,455!
These are not insignificant differentials. But if you can get over this, the tax breaks can be significant. Often, these are enough to defray the heavy price tags.
Let’s quickly look at the various tax benefits of buying an electric vehicle through your limited company.
Road Tax
Currently, all electric vehicles are exempt from road tax. This is due to change in April 2025. After that date electric vehicles will be subject to road tax at the standard rate.
Capital Allowances
If you buy an electric vehicle brand new through your limited company, you can claim a First Year Allowance on 100% of the cost against your taxable profits. This represents a significant reduction in your corporation tax liability: If the cost of the electric vehicle is £50,000, then you can take between £9,500 and £13,250 straight off your corporation tax bill, depending on the prevailing rate of tax.
Note: to claim 100% Capital Allowances the electric vehicle MUST be purchased brand new.
If you buy second hand, you will still get capital allowances, but at the lesser rate of 18%. If you paid £50,000 for a second hand EV, the reduction in your corporation tax bill would be, by contrast, £2,385.
Value Added Tax
Only in exceptional circumstances, can you expect to be able to reclaim VAT on the purchase of a new vehicle, regardless of whether it's electric or not. You can only claim the VAT back if there is absolutely zero private use (commuting included). This almost never happens.
If you lease the car though, you can claim 50% of the VAT back on the leasing payments, even if there is private use. This is the same for all cars, not just EVs.
Benefit-in-kind tax
This is where the BIG savings are. Read on:
When a car is provided to an employee or director of a company, there is a benefit-in-kind which has a tax charge for the employee or director. The company also needs to pay employers NIC.
The BIK is based on the CO2 emissions of the car: the lower the CO2 emissions, the lower the BIK. A fully electric car has zero emissions, so the BIK is as low as it can possibly be. Currently, the BIK is 2% of the car’s value.
Director’s tax on the BIK
The BIK mentioned above is added to your income from other sources and is taxed according to your prevailing personal tax rate. A £50,000 EV would have a BIK of £1,000 (£50,000 X 2%), and you’d pay tax of £200 at the basic rate, £400 at the higher rate, or £450 at the additional rate.
By comparison a diesel or petrol car of the same value, but with emissions of 181g/km (which is fairly typical attracts a BIK of 37% of the car’s value. The BIK would therefore be £18,500, and the tax payable would be £3,700 at the basic rate, £7,400 at the higher rate, and £8,325 at the additional rate.
Employers’ NIC on the BIK
The basis for calculating the NIC payable by the employer - ie, your limited company, is the same as for director’s tax. IE, the NIC is payable on the BIK as calculated by the car’s value and the emissions.
Employers’ NIC is payable at 13.8% of the BIK. In the example above, the EV would attract a NIC charge of £138. The diesel or petrol car would attract a charge of £2,553.
Making Fair Comparisons
So far, so easy. On the face of it, the EV is very tax efficient and it seems a no-brainer to say “Get the EV, put it through the company” and that’s probably fair. But, as we saw at the very start of the article, price differences are huge. Equivalent models are normally about 20% to 30% higher for an EV than for a petrol or diesel equivalent. So, here’s a side-by-side example, using the Peugeot 2008 SUV mentioned above.
So, that represents a significant saving even if the capital cost is 30% higher. If you take into account that running costs of an EV are estimated to be significantly lower as well, it’s fair to say that electric is fast becoming a good business bet.
Residual / resale values
The main concern in an immature market such as the EV market is the residual values. We just don’t know what they are yet. According to www.carwow.com, however, it is estimated that on average EVs retain 49% of their value after three years whereas petrol and diesel are closer to 40%. If this is correct, and sustainable, this is another tick in the EV column.
Financing options
The options available to finance electrical vehicles would appear to be the same as for petrol and diesel cars.
Our example above relates to an outright purchase, which of course can be financed through an HP agreement, but given the doubt around the residual values, it might be an option to derisk by financing on a lease or contract hire where the residual value is the leasing company’s problem, not yours, you just pay a fixed amount every month and at the end of the term, hand the keys back to the finance company.
Another benefit of leasing as opposed to outright purchase is that you can claim the VAT back on the payments. This drops to 50% of the VAT if there is any personal use.
Sources / further information
There’s some great (and not so great) information on this subject online. Have a look at the following. Some are Acumenica partner organisations, some aren’t. All are useful:
www.comcar.co.uk is an excellent source which show the BIK cost of every car in the UK market.
www.swoopfunding.com is Acumenica’s financing partner. There are some excellent articles on the different finance options on there.
www.just-leasing.co.uk are the go-to guys if you want to learn more about leasing.
www.gov.uk/tax-company-benefits/tax-on-company-cars is HMRC’s page on this topic.
The Acumenica team are on hand to help business owners with all tax matters. To arrange a no-obligation confidential chat, please complete the form on our Contact Us page or call 03330 166559.
