Have you been thinking about changing your car recently and are wondering about buying an electric car to help the environment – sorry, reduce tax?
This is a good thing. Yes, A GOOD THING.
HMRC have made this a good thing by allowing companies to get full tax relief when they buy a brand new, fully electric company car. That’s right. FULL tax relief. There aren’t many times we get asked a question about an expense and the answer is go ahead. Do it. Because electric cars tick all the boxes.
I will explain how this works below.
Tax benefits of buying an Electric Car
If your company buys (or finances through Hire Purchase) a brand new electric car, 100% of the cost of the car is written off the company’s profits in the year that the car is bought. If your car costs £50,000, that means a reduction in tax of £9,500.
All the running costs of that car can then also be claimed by your company – insurance, repairs, servicing etc.
The car MUST be a brand new car and this relief does not apply to hybrid cars – it must be a fully electric model.
A slight downer is that VAT cannot be claimed on the purchase. Instead the VAT inclusive cost is allowed for corporation tax relief.
Personal Tax cost
If a car is provided by a company to a Director or Employee, a benefit in kind arises and this has to be reported to HMRC annually on a form P11d. A tax charge then becomes payable by the employee or Director.
So what tax would I have to pay on an electric car?
Even this is good news (told you buying an electric car was a good thing!).
The personal benefit in kind arising on fully electric cars is only 2% of the list price of the car (compared with non electric cars where the percentage ranges from 5% to 37% depending on the CO2 emissions).
In my example above, if the car costs £50,000, the benefit in kind will be 2% per year or £1,000 benefit per year. In tax terms that means either personal tax of £200 or £400 per year depending on whether you are a basic or higher rate tax payer.
More good news – your company can pay for an electric charging point to be installed at your home address and get full tax relief for this (as well as claiming VAT on the purchase) without there being an extra benefit in kind charge on you personally.
Leasing an Electric Car
Leasing an electric car is not quite as good a deal in tax terms as buying outright (or financing under Hire Purchase).
The lease payments paid on a monthly basis (as well as the initial deposit) will be allowed as a normal business expense. So say the monthly lease costs are £500 + VAT, each year the company will get a reduction in its profits of £6,000 meaning a reduction in tax of £1,140 or £1,500 depending on the year and level of profits.
Lease payments also attract VAT and the rule is that 50% of the VAT can be claimed on your VAT return.
In my example, a lease of £500 + VAT per month means £50 VAT per month can be claimed.
The personal tax benefit is calculated in the same way as for a fully purchased car ie 2% of the original list price each year.
Come on, there must be a downside?
It’s hard to think of any when it comes to electric cars.
Obviously, we’re not fortune tellers (goodness me, that would be such a cool thing to be) and therefore we can’t predict what future governments are going to do and the relief/personal tax benefits MAY change.
Also, when you come to sell the car, the proceeds will be taxable on the company (bearing in mind this is tax, ying and yang, HMRC won’t give you something without there being something repayable at a later date).
If you have never done a P11D form before, that will be an extra bit of admin which we can help you with – let us know if you would like a quote for completing this form each year.
In summary, buying an electric car is a great tax decision. If you are thinking about a new car, an electric one might just tick all the boxes (as well as being environmentally friendly – did we mention that?).
We have a number of clients who have already done this and not only have they loved the tax savings that ensue but they also really love their brand new electric cars.
As always, if you would like to chat the numbers through with us, please book a call here.