Tax benefits of switching to electric vehicles

13th January 2021

The UK Government is keen to encourage more drivers to purchase electric cars rather than petrol and diesel. The amount and diversity of electric and hybrid cars available today is ever increasing and likewise the electric range.

The infrastructure available, from a charging perspective, is rapidly increasing and improving and today electric car sales in the UK are the 12th highest in the world!

There are considerable tax benefits both for the employer and the employee in switching to fully electric company cars and certain hybrids.

From a benefit in kind perspective, however, choosing other hybrids will not fully take advantage of the employee’s maximum tax breaks. Additionally, the capital allowances available will be less. Accordingly, careful consideration is necessary, prior to purchase!

Let's look at some of the advantages in brief....

The Tax Position Relating to Fully Electric Company Cars
 
Petrol has peaked, as half of drivers are considering switching to a fully electric car!
 
Directors and employees who drive fully electric company cars will have a nil taxable benefit for 2020/21.  For the previous tax year, 2019/20, fully electric company cars were taxed at 16% of the list price.
 
Accordingly, significant reductions in the taxable benefits of electric cars have been made from 6th April 2020!  To give you an example, the previous benefit in kind charge for a £70,000 Jaguar I-pace (all-electric car with a 298 mile range) was £11,200, and from 2020/21 this has reduced to nil. Some will consider this to be an amazing tax-free perk, but it is for one year only… 
 
The chancellor confirmed in his March 2020 Budget that employees with fully electric company cars would be taxed on the 2022/23 benefit in kind rates of 2% for 2023/24 and 2024/25.

What about available Government Grants?

The government’s ‘plug in’ financial grant is designed to encourage and increase the purchase of electric cars in the UK. The grant is restricted to 35% of the purchase price, capped at £3,000, towards the cost of a plug in electric car.  There are various conditions to be met in order to get this grant:

1. It must be brand new.

2. It must have CO2 emissions of less than 50g/km.

3. It can travel at least 70 miles without any emissions at all (its electric range).

4. It must cost less than £50,000. This figure is the recommended retail price (RRP), and this includes delivery fees and VAT.

All fully battery electric cars will qualify, but very few hybrids will qualify as they will not have the required electric range.  The dealer will reduce the vehicle’s price by the value of the grant.

There are also government grants for certain electric motorcycles and mopeds (maximum grants £1,500).

There is also a government grant towards the cost of an electric van.  These electric vans must have CO2 emissions of less than 75g/km and must be able to travel at least 10 miles without any emissions at all. The government grant for an electric van is 20% of the purchase price, up to a maximum of £8,000.

How do we charge these vehicles? (Electric Charging Points and Charging Costs)

If a business installs, at their workplace, charging points for electric vehicles, they can claim 100% FYAs for these costs. Furthermore, if an employer allows its employees to charge up their own electric cars each day at the workplace, there is no taxable benefit in kind. This is a very good tax free perk!

The tax legislation does not treat electricity as fuel. The S.149 ITEPA 2003 fuel benefit charge does not apply to electricity supplied by an employer. Accordingly, no taxable benefit in kind will arise if an employer pays to charge a pure electric company car at the workplace, irrespective of the level of the employee’s private mileage.

The following conditions must be met, in order for the exemption to apply:

1. The charging facilities must be provided by the employer, at or near the employee’s workplace.

2. The electric charging must be available to all the employer’s employees generally, or all the employer’s employees generally at the employee’s workplace.

3. The charging facilities must be for the battery of a vehicle in which the employee is either the driver or a passenger.

What about charging the vehicle at home - Electric Vehicle Home-Charge Scheme
 
If the employee owns or leases an electric car, they could be entitled to a government grant under the electric vehicle home charge scheme towards the cost of installing an electric charge point. The individual must have dedicated off-street parking at their property.
 
The electric vehicle home charge scheme is a government grant that provides a 75% contribution to the cost of an electric charge point and its installation. The grant is capped at £350 (including VAT) per installation.
 
An individual could apply for two such grants towards electric charge points at the same property, so long as they have two qualifying vehicles. The individual must be resident at the property.
 
Electric Vans
Electric vans are becoming very popular with directors and employees.  From 6th April 2021 onwards, there will be a zero van benefit charge for employees who drive fully electric vans and use them privately. So the tax on this electric vehicle is reducing permanently downwards to nil!
 
For the current fiscal year, 2020/21, employees using electric vans privately are taxed on 80% of the normal van benefit figure…
 
Electric Bicycles
An e-bike, put simply, is an electric-assisted pedal bicycle. It is a regular bicycle which has, in addition, an electric motor and battery.  The electric motor will provide power assistance when the cyclist is pedalling, to minimise the amount of effort required.
 
E-bikes can make cycling accessible to individuals who would otherwise find it difficult. It makes the journey much quicker and easier! An e-bike will offer the individual between 25-100 miles of pedalling enhancement on a single charge.
 
What about recharging the Battery?
It is quite usual for an e-bike to come with a 36V battery which will normally take approximately 4 hours to charge from 0 to 100%.  The running costs of e-bikes are indeed very low.
 
And what is the Tax Position for the Employee?
It is vital that the employee is using an e-bike (i.e. a bicycle with an electric motor) rather than an electric motorbike.  An electric bicycle must not have a motor-powered top speed in excess of 15.5 miles per hour.  Additionally, the electric motor must have a maximum power output of 250 Watts. Anything above this would mean that the employee would be riding an electric motorbike, with much higher personal tax consequences.
 
A popular e-bike is the Cube Reaction Hybrid Pro 625 Mountain Electric Bike. The cost of this e-bike is £2500.
 
Can you consider the Cycle to Work Scheme?
An e-bike will qualify for the “Cycle to Work Scheme”.  Accordingly, an employer can provide an expensive e-bike to an employee without a P11D benefit in kind arising.
 
The Cycle to Work Scheme assists an employee and spreads the cost of the bike via monthly tax-free instalments that the employer pays to the employee.
 
How the scheme works
• The employer registers with the scheme provider.
• The employee chooses the e-bike he wants.
• The employer purchases it.
• The employee pays the employer back for the purchase through monthly instalments taken through the payroll.
• The salary sacrifice periods are for a minimum of 12 months, and can possibly be up to 48 months.
 
The monthly repayments for the e-bike are taken from the employee’s gross salary.
Accordingly, this will result in the employee paying less tax and NIC every month. At the end of the Cycle to Work Scheme, the employee will have saved up to 32% of the cost of the bike if he is a basic rate taxpayer. If the employee is a higher rate taxpayer, the tax saving will be even greater.
 
There is an end-of-scheme payment due, because technically the employee has been loaned the e-bike and at the end of the period, has to purchase it at a “fair market value”.
 
This normally works out at approximately 7%, however some qualifying scheme providers only charge £1.  The scheme is easy to administer for the employer.
 
The employer will also save NIC (employer’s contributions of approximately 13% on the cost of the bike).
 
Electric Motorbikes
There are no specific tax advantages for an employee driving a company electric motorbike privately.  If an employee has a company electric motorcycle, he is taxed on 20% of its value plus its running costs.
 
Vehicle Excise Duty
The vehicle excise duty (VED) rates for all fully electric vehicles have been reduced to nil at least until 2025. Additionally, fully electric vehicles costing more than £40,000 are also now exempt from the “expensive car supplement” on VED. The previous additional supplement of £320 is no longer payable.
 
There are reduced VED rates which apply to plug-in hybrid vehicles
 
Hybrid Company Cars
Hybrid cars are, in general terms, cars that have both a petrol engine and an electric motor.
There are now various considerations to take into account to determine the taxable benefit for an employee driving a hybrid company car.
 
The percentage of the list price of the hybrid company car, which will be taxed as a benefit in kind, will be determined by the CO2 emissions of the car. Additionally, its electric range will have to be taken into account.
 
Accordingly, the number of miles that a hybrid company car can do on battery power alone, before reverting to petrol (its electric range) will be a big factor.  The more miles that a hybrid car can do on battery power, the less the taxable benefit.  
 
The percentage will also depend on whether the car was first registered on or after 6th April 2020 (see Government published rates tables for further information) 

Considering the benefits of making the switch to electric vehicles can be complex. If you wish to speak to a member of ABG's team regarding the associated costs and tax benefits please contact us on 020 7330 0000.

(c) Tim Palmer, Tax Consultant