Saffery Champness review of tax benefits of lower emission vehicles

The move to drive down the UK’s carbon footprint is increasingly evident in the taxation of low and zero-emission vehicles – not only in terms of the taxable benefit in kind falling on employees for such vehicles provided by employers but also with regard to vehicle excise duty and capital allowances.

Ian Harlock-Smith, tax director, Saffery Champness, and member of the firm's professional practices group, highlights the tax benefits of moving to lower emission vehicles, as the incentive to switch strengthens. He says: “The benefit in kind rate for low and zero-emission vehicles is now structured to make buying electric vehicles much more attractive. The taxable benefit for electric-only cars is just 1% in 2021/22, and 2% in 2022/23. The road tax rates for pure electric vehicles have been reduced to nil until at least 2025.

“For hybrid vehicles with CO₂ emissions from 1-50 g/km, the taxable benefit rate increases gradually up to an annual charge of 14% of the list price, as the electric range decreases. These vehicles can also benefit from reduced rates of road tax.”

Businesses can claim 100% of the cost of a zero-emission electric vehicle, as a first-year allowance against the taxable profits of the business in the year of purchase. There are no restrictions on the value of the vehicle or annual expenditure limit, but the vehicle must be purchased new and unused.

Companies can also now benefit from the new ‘super-deduction’ which offers a 130% first-year allowance on qualifying electric charging points for cars. To qualify for the relief, the company must use the charging point in its own business. The super-deduction is only available for companies and for qualifying expenditure up to March 31, 2023.

Harlock-Smith adds, “There is also the government plug-in car grant which is designed to promote the uptake of electric vehicles in the UK. The government will now provide a grant of up to £2,500 towards the cost of an electric plug-in vehicle, where it costs less than £35,000. It is applied at the time of purchase and is usually given as a discount from the price of the vehicle. The vehicle must have an electric range of at least 70 miles and, if a plug-in hybrid, must also have combined CO₂ emissions of 50g/km or less.

“It should be noted, however, that VAT is not recoverable on the purchase unless it can be demonstrated that the vehicle is only available for and used solely for business purposes, which in practice is usually very difficult to achieve.”

A 100% first-year allowance is also available for businesses installing charging points for electric vehicles up to March 31, 2023, and, where employees have had free use of an employer’s charging point at or near the workplace to charge their own electric vehicle, there is no taxable benefit for the employee. Where the employer reimburses employee costs for charging their own electric vehicle away from the workplace, however, a taxable benefit will arise. There is no taxable benefit where an employer pays for the cost of charging an employer-provided electric vehicle.

There are other points to note with regard to vehicle charging, reimbursement, and VAT recovery, and a discussion with your tax advisor would be beneficial if considering investing in low-emission or electric vehicles, to ensure the correct tax treatment.