Is your limited company considering the switch to an electric vehicle (EV)? It’s a strategic move that can not only boost your company’s green credentials but also offer significant tax advantages. This guide will walk you through the tax implications of acquiring and using EVs, helping you make informed decisions that benefit your company and employees.
Corporation Tax and Capital Allowances: What You Need to Know
The tax treatment of electric vehicles for limited companies varies depending on how the vehicle is acquired. Here’s a breakdown:
Outright Purchase
When your company buys a new, unused electric car, you can claim a 100% first-year capital allowance. This allows you to deduct the full cost of the vehicle from your taxable profits in the year of purchase, significantly reducing your corporation tax liability.
If your company does not have sufficient profits to offset the entire cost in the first year, you can use the allowance to create a loss. This loss can be carried back against the profits of the previous 12 months, generating a corporation tax repayment, or carried forward to offset against future profits.
Alternatively, you can elect to claim **18% annual allowances** on a reducing balance basis. This approach allows you to claim 18% of the vehicle’s value each year, with the claimable amount decreasing as the value reduces.
If you purchase a second-hand electric car, you are not eligible for the 100% first-year allowance, and can only claim the 18% annual allowance.
Hire Purchase:
A hire purchase agreement is treated similarly to an outright purchase for tax purposes. Your company can claim a 100% first-year allowance for a new electric vehicle, and you can also claim the full amount of interest charged on the agreement as an allowable business expense. If the vehicle is pre-owned, the 18% annual allowance applies.
Leasing:
Under a lease agreement, your company doesn’t legally own the vehicle, therefore no capital allowances can be claimed on the vehicle itself. Instead, the full monthly lease payment may be deducted from your company’s trading profits. This applies whether the car is new or pre-owned.
There are two main types of lease; finance leases and operating leases. With a finance lease, tax relief is given on the depreciation and the interest charged on the lease. With an operating lease, tax relief is given on the rental payments. There is a 15% restriction on the tax deduction for both finance and operating leases if the car has CO2 emissions of over 50g/km.
Private Use:
Unlike sole traders, there are no adjustments needed for private use by an employee or director, because company cars are always subject to benefit in kind rules. This means that the tax is charged to the individual who has use of the car rather than the company.
Commercial Vehicles:
New zero-emissions commercial vehicles qualify for 100% first-year allowances or the 100% Annual Investment Allowance (AIA). Second-hand zero-emissions commercial vehicles and commercial vehicles that emit CO2 qualify for the 100% AIA. The 100% FYAs for new zero-emissions goods vehicles are due to end on 31 March 2025 (companies).
VAT: What You Can and Cannot Claim
VAT rules for electric vehicles can be complex:
- Purchase: Input VAT is not normally recoverable on the purchase of cars, whether new or used.
Hire Purchase: Input VAT is also not recoverable on a hire purchase agreement for a car.
Leasing: You can recover **50% of the input VAT** charged on a lease payment. - Charging: You can claim VAT for charging when the car is for business use.
Workplace Charging: Where workplace charging is provided to employees the business may recover the VAT. - Public Charging: Input VAT may be recovered on the supply of electricity used to charge electric vehicles where there is business use where the vehicle is charged at a public charging point.
- Output VAT: Output VAT must be charged on any element of electricity provided for private use as a deemed supply.
- Home Charging: VAT on the business use element of electricity taken from home charging points is only recoverable for sole traders and partners and not for employees/directors. This is currently being reviewed by HMRC.
Company Car Benefit and Benefit in Kind (BIK)
When a company provides an electric car for private use by an employee or director, this creates a ‘benefit in kind’ which must be reported on a P11D form each year and submitted to HMRC by 6th July following the end of the tax year.
Class 1A National Insurance: The company will pay Class 1A National Insurance (13.8% for 2023/24) on the ‘cash equivalent’ of the car. This payment is an allowable deduction from taxable profits when calculating corporation tax.
Employee Tax: The employee will also have the ‘cash equivalent’ added to their earnings and will pay income tax on this amount.
Cash Equivalent: The ‘cash equivalent’ is calculated using the following formula:
List price of the car + Accessories on the car – Capital contributions by employee (maximum £5,000) = Revised list price
The revised list price is then multiplied by a ‘relevant percentage’ based on the vehicle’s emissions. For electric or zero-emission cars, the relevant percentages are:
- 2% for 2022/23, 2023/24 and 2024/25
- 3% for 2025/26
- 4% for 2026/27
- 5% for 2027/28
Double Cab Pickups:
Double cab pick-up vehicles with a payload of one tonne or more will now be treated as cars for benefit-in-kind purposes. Transitional arrangements apply for employers who have purchased, leased, or ordered a double cab pick-up before 6 April 2025, and they will be able to use the previous treatment, until the earlier of disposal, lease expiry, or 5 April 2029.
Other Tax Considerations
- Vehicle Excise Duty (VED): Pure electric vehicles are currently exempt from VED. However, this exemption ends in April 2025, and from this point electric cars will be taxed the same as conventionally fuelled vehicles. New zero-emission cars registered on or after 1 April 2025 will pay the lowest first-year rate of VED, and then the standard rate from the second year.
- Congestion Charges: EVs are exempt from congestion charges in Clean Air Zones (CAZs), however this exemption ends in December 2025.
- Fuel Benefit Charge: There is no fuel benefit charge for electricity.
- Mileage Allowance: There is a specific rate per mile for company-provided electric vehicles which is reviewed quarterly. Where employees use their own car the mileage allowance is 45p per mile for the first 10,000 miles and then 25p. Electric vehicle owners can also claim 5p per mile for each passenger they take on a business journey.
- Charging Points: Businesses can claim 100% first-year capital allowances on the cost of electric vehicle charging points. For unincorporated businesses, if there is private use, the charging point may need to be separately pooled for capital allowance purposes.
Key Points for Limited Companies
- 100% First-Year Allowance: New electric cars qualify for a 100% first-year allowance, allowing you to deduct the full cost from your profits in the year of purchase.
- Second-hand vehicles do not qualify for the 100% first-year allowance.
Leasing: You cannot claim capital allowances when leasing an EV, but monthly lease payments can be deducted from profits. - VAT: Input VAT is not recoverable on the purchase of a car, but 50% of the VAT on leasing costs is recoverable.
- Benefit in Kind: When a company provides an electric car for private use, it creates a BIK that needs to be reported on form P11D.
- Class 1A NIC: The company pays class 1A National Insurance on the cash equivalent of the vehicle.
- Records: Maintain accurate records of all transactions relating to the vehicle and ensure P11D forms are submitted on time.
Professional Advice: Consult a qualified accountant to ensure that you are taking full advantage of all available tax reliefs and meeting your compliance obligations.
By understanding these tax implications, your limited company can make the most of the financial incentives for switching to electric vehicles while also contributing to a more sustainable future. If you have any further questions, it is always best to seek professional advice.