Writing for ICAEW TAXline, Sam Inkersole explains how electric company cars offer a favourable benefit in kind for employers and employees alike.
When I was a child, nothing used to beat the thrill of Dad bringing home his new company car. It was an event that would occur every couple of years and, I later found out, was a tax-efficient benefit designed to encourage mass car uptake and stimulate the UK car industry.
Over time, these benefits dwindled and governments have tightened the benefit rules, resulting in a benefit in kind (BiK) of up to 37% of the list price each year for the highest-emission diesel cars. It is therefore not surprising that the company car BiK fell out of favour with companies and taxpayers.
The age of the electric car has changed this, with favourable BiK charges for employees and tax deductions for the employer. They have been designed to encourage individuals to move towards purchasing electric vehicles, which are better for the environment and will assist the government in meeting its net-zero target.
While ‘company car’ is a familiar phrase, and used throughout this article, the more appropriate term may be ‘employer-provided car’. The employer does not have to be a company – the same rules apply where the employer is a sole trader, partnership or LLP.
Employee BiK
For the 2021/22 tax year, where the car is 100% electric, the BiK charge is just 1% of the list price of the car. This rises to 2% for each of the next three tax years. This charge covers all the costs incurred by the company in connection with the car, except for the:
- provision of a chauffeur; or
- payment by the company of fines, penalties, parking charges, etc, for which the employee is personally liable.
In addition to the provision of the car, the company can provide further benefits alongside a company car without giving rise to any additional taxable benefits. These include:
- insurance;
- maintenance;
- installation of a charging point at work;
- installation of a charging point at the employee’s home;
- provision of a charge card to allow access to charge points; and
- recharging at work (or in other circumstances where the company has the primary responsibility for paying the supplier).
If the total expenditure by the company is looked at in comparison with the 1% (or 2%) BiK charge, it is abundantly clear that the benefit to the employee from a tax perspective is nothing short of fantastic. Given the costs to the employer, it may be that they enter into a salary sacrifice arrangement with the employee (see below).
Treatment of costs incurred in the provision of the car for the employer
There are generally two ways an employer can obtain a car that it can then provide to an employee as a benefit: outright purchasing or leasing.
An outright purchase of an electric car will be a capital asset purchase by the company, on which first year allowances (FYAs) can be applied: albeit the following example demonstrates that sometimes it is not always beneficial to claim FYAs. This relief is separate from the annual investment allowance (AIA) and FYA claims do not eat into the AIA a company can claim.
Leasing used to be a less attractive option due to the risk of employees leaving before the end of the lease, saddling the employer with a large liability to keep on paying. However, there are now leasing options that allow for the employee to cancel the lease without a cost to the employer, although these are more expensive than standard leasing options.
A lease can be that of an operating or finance lease, depending on the characteristics of the lease. While the accounting and tax treatments for each differ, the end result remains the same: an allowable deduction for costs associated with the asset.
If the car is not used exclusively for business purposes, it is not possible to reclaim the VAT on the car purchase. For leased cars, it may be possible to reclaim 50% of the VAT payable on the lease payments: the 50% cap is imposed to account for the private use element, regardless of the actual amount of private use.
Where a company installs electric charging points in its car park (before 31 March 2023), the costs of purchasing and installing them will be eligible for a 100% deduction against taxable profits in the year the expenditure is incurred, under the FYA rules.
HMRC recently clarified its position on VAT reclaims on electricity provided to charge cars. Where an employee charges their car at home, no VAT can be reclaimed as the electricity supply is to the employee not the company. Where the car is charged at the employer’s premises, the employee needs to keep a record of business and personal mileage: only the proportion of VAT attributable to the business mileage can be reclaimed.
For owner-managed businesses, there is scope for tax arbitrage in the case where an electric car is provided to an employee (eg, spouse, civil partner or significant other). The employer would obtain full tax relief on the costs of providing the car, but the employee would be taxable only on the low BiK. If this sort of planning is undertaken, records should be kept to show that the total remuneration received by the employee is in line with what any other employee would receive.
Should a company utilise FYA?
Companies may be forgiven for thinking that taking the 100% FYA deduction in the first year is the best method to minimise the company tax liability. However, given the increase in corporation tax to rates of up to 25% from 1 April 2023, there may be circumstances (when a sale of the company car is planned to happen in the future) where taking a normal writing down allowance (WDA) at 18% leads to a better tax result over the period the car is owned by the company.
In the following example, Company A purchases an electric car in the year ended 31 March 2022 for £50,000 and then sells the car for £20,000 in the year ended 31 March 2025.
- If FYA is claimed, there is tax relief of £9,500 [£50,000 x 19%] in Year 1, followed by a balancing charge of £5,000 [£20,000 x 25%] in Year 4 – giving net tax relief of £4,500.
- If no FYA is claimed and WDA is claimed only when the corporation tax rate increases to 25%, in Year 3 there are WDAs of £9,000 [£50,000 x 18%], giving tax relief of £2,250 [£9,000 x 25%]. There is then tax relief on a balancing allowance of £5,250 [(£41,000 – £20,000) x 25%] in Year 4 – giving total tax relief of £7,500.
It is therefore worthwhile for a company purchasing a company car to look at the future plans and expected cash flows attributable to the car, to take advantage of and maximise the tax relief obtained by purchasing the car.
Salary sacrifice arrangements
The sweeping changes to the BiK rules, introduced in the Finance Act 2017, largely did away with arrangements in which employees gave up an amount of their earnings in return for a benefit. However, certain benefits remained excluded from these changes, including arrangements that allowed for the provision of a car with CO2 emissions of 75g/km or less.
In addition, there is no prohibited benefit arising where other benefits in connection to the car are provided in exchange for a sacrifice of salary (ie, car insurance/charging point provision) except for fuel or a chauffeur.
Salary sacrifice arrangements are generally popular. As the employee makes payments towards the benefit out of their gross salary, the employer does not have to pay national insurance contributions at 13.8% (15.05% in 2022/23) on the salary sacrificed (which gives a real cash saving) and the employer obtains a contribution towards the expenses that they are incurring in providing the car. It can really be described as a win-win situation for both employee and employer, with generous tax savings for both parties.
It’s electric!
The tax benefits for all involved are therefore clear. As an employer, the provision of a company car may be something that draws new employees to your company or encourages current employees to stay. As an employee, the potential tax savings by using a salary sacrifice scheme may encourage you to ask the company you work for to look into such a scheme. One thing we can be sure of is that there will be many children with smiles on their faces when their parents bring home a new and ‘cool’ electric company car.
This article was first published in the January 2022 issue of ICAEW TAXline is also available here on the ICAEW website.
Our earlier article about the tax advantages of electric cars and other low emission vehicles is available here.