What are the benefits of buying an electric car?
The Government is committed to encouraging the purchase of electric cars. One way it does this is by offering generous tax breaks, including:
Capital Allowances: If your business purchases a new and unused electric car you get full tax relief in the year of purchase. Buy a £50,000 car, save £9,500 in corporation tax. This compares very favourably to non-electric cars which receive only 6% (£570) or 18% (£1,710) relief in year 1 depending on their CO2 emissions. In addition, 130% relief is available for installing charging points.
Employee Benefit: It’s possible to have your company buy you a £38,900 Tesla, exclusively for your personal use, and pay tax of just £155.60 per year depending on your level of income. As far as tax relief goes, that’s unbelievably generous! Certainly a lot cheaper than paying tax on £38,900 of salary.
”Fuel”: If electric cars are charged at work, and the business picks up the cost, that doesn’t count as a taxable benefit. So long as the business owns the car, installing a charging station at the employees home would also not constitute a benefit.
Road Tax: The less CO2 your car produces, the lower the road tax. For zero emission vehicles, road tax is currently nil for 2022/23. Vehicles with a list price of more than £40,000 also normally attract an extra £335 a year in road tax but this is also waived for zero emission vehicles.
Combined with the environmental benefits and the relatively low cost of electricity as compared with petrol, if you’re considering purchasing a new car it’s definitely worth considering an electric one!
Should I buy, lease, hire purchase, PCP, etc.?
This is not a decision we feel should be principally driven by the tax treatment. Instead, we recommend putting tax to one side for a moment and considering which option makes most sense from a purely commercial basis:
- Are you going to want to own the car in, say, five years time or would you be looking to upgrade?
- How much more would you pay, in total, under a hire purchase deal as compared with PCP?
- What about if you add in the PCP balloon payment?
- How reliable do you think the car is and how much of a disaster would it be were it to require expensive repairs?
- Who would be on the hook for those repair costs?
Once you have determined the most sensible approach from a commercial perspective, you can find the tax treatment below:
Purchase: You would get relief by means of capital allowances. So, for a £50,000 car your limited company would get corporation tax relief of £9,500 (£50,000 Purchase Price x 100% First Year Allowance x 19% Corporation Tax Rate).
Hire Purchase: Again relief would be through capital allowances, same as for an upfront purchase. To the extent interest is charged, this is a deductible business expense.
Operating Lease: The monthly lease fees are deductible business expenses. So, say the monthly cost is £1,000. You claim £12,000 a year as a deduction in your corporation tax return and save £2,280 in tax (£12,000 expense x 19% Corporation Tax Rate).
Finance Lease: The asset is, “depreciated” over its economic life in the accounts. The depreciation and any interest are deductible expenses. Say the lease payments are £50,000 over 8 years. You can deduct 1/8th the cost each year, so £6,250, saving £1,187.50 in tax (£6,250 depreciation x 19% Corporation Tax Rate).
For sole traders, relief would be at their marginal rate of tax (20%, 40% or 45%) rather than at the 19% corporation tax rate. So, in theory, were a sole trader to purchase a £50,000 electric car solely for business use they could save up to £22,500 in tax by buying through their business (£50,000 x 45% Additional Rate).
What’s the difference between an operating lease and a finance lease?
An operating lease is a typical, bog standard lease agreement. You get the use of a car, you pay a fee and in 5 years you hand the car back in.
A finance lease arises where the lease, “transfers substantially all the risks and rewards incidental to ownership.” This might exist where, for example:
- The lease is fairly long,
- If you add up the total payments it’s very close to buying the car,
- You’re on the hook for repairs, insurance, and any other costs,
- You have the option to buy at the end of the contract for a small fee
Depending on how they’re drafted, PCP contracts can sometimes fall within the definition of a finance lease. The easiest way to tell for sure if the dealer thinks what they’re offering is a finance lease is to ask whether VAT will be due monthly, on the lease payments, or upfront on the value of the car.
“Bottom line though, why not just buy an electric car myself?”
Let’s take an example:
Sam is a dental associate who operates through a limited company. He’s considering buying an electric car, mostly for private use. He plans to spend £50,000 on the car and is a higher rate taxpayer.
Option 1: Sam has his company declare a £50,000 dividend which he uses to buy the car. He pays tax at 33.75% on the dividend. That costs him at least £16,875 in income tax.
Option 2: Sam has his limited company buy the car. There is no dividend tax to pay so he’s saved £16,875 right off the bat. He can also claim capital allowances which save him £9,500 in corporation tax. Tax on the benefit will be just £400 for 2022/23. So, all in, Sam is £25,975 better off buying in the company than buying himself – more than half the value of the car!
I know which option I’d pick!
It’s worth flagging that the example above would be very different if Sam were operating as a sole trader. The capital allowances, for example, would be reduced in line with the private use making it much less beneficial. Avoiding private use adjustments is yet another reason sole traders might want to consider the question – should I incorporate?
If you’d like to discuss the merits of purchasing an electric car through your business in more detail, please don’t hesitate to give us a call on 01326 660022 or email us at email@example.com.