Are you a sole trader considering the switch to an electric vehicle (EV) for your business? It’s a smart move that can not only help the environment but also offer significant tax advantages. This guide will walk you through everything you need to know about how EVs are taxed, helping you make informed decisions to benefit your business.
Income Tax and Capital Allowances: What You Need to Know
When it comes to income tax, the way you acquire your electric car significantly affects the tax relief you can claim. Let’s break it down:
Outright Purchase
If you buy a new, unused electric car, you’re in luck. You can claim a 100% first-year capital allowance. This means you can deduct the entire cost of the vehicle from your profits in the year of purchase. This can drastically reduce your tax bill in the first year.
If you don’t have enough profits to offset the full cost, you can create a loss which may be used to reduce your other income tax liability or carried back or forward to other accounting periods.
Alternatively, you can choose to claim 18% annual allowances on a reducing balance basis. This means that the amount you can claim reduces each year as the value of the vehicle decreases.
If you purchase a second-hand electric car, you can only claim the 18% annual allowance.
Hire Purchase
A hire purchase agreement is treated similarly to an outright purchase for tax purposes.You can claim a 100% first-year allowance for a new electric vehicle, and the interest on the agreement is also an allowable business expense. Again, if the vehicle is pre-owned, the 18% annual allowance applies, and allowable costs and interest are restricted based on private use.
Leasing
If you choose to lease an electric vehicle, you don’t legally own the car. Therefore, you cannot claim capital allowances on the car’s value. Instead, you can deduct the full monthly lease payment from your business profits, subject to adjustments for private use. This applies whether the vehicle is brand 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. If the car has CO2 emissions of over 50g/km there will be a 15% restriction on the tax deduction.
Flat Rate Expenses
Instead of claiming capital allowances, you can use a flat rate allowance of 45p per mile for the first 10,000 business miles and 25p per mile thereafter. You can also claim the interest on a hire purchase or finance lease, but it is restricted to the business use element. Importantly, if you choose to use flat-rate expenses, this election is irrevocable for the life of the vehicle.
Private Use
It’s crucial to note that if you use your electric vehicle for both business and personal journeys, the amount of capital allowances, lease payments, and interest you can claim is restricted to your business use. For example, if half of your mileage is personal, you can only claim half of the allowable costs.
VAT: What You Can and Cannot Claim
VAT can be a bit tricky. Here’s how it works for electric vehicles:
- Purchase: Generally, you cannot recover input VAT on the purchase of a car, whether new or used.
Hire Purchase: As with an outright purchase, input VAT is usually not recoverable on a hire purchase agreement. - Leasing: You can recover 50% of the input VAT charged on a lease payment. If the car is used for both business and private use, only 50% of the VAT on the business proportion of the lease payment can be reclaimed.
- Charging: You can claim VAT for charging when the car is for business use.
Home Charging: If you charge your electric car at home, you can recover VAT on the business portion of electricity used. This is not applicable to employees or directors, though it is currently being reviewed. - 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.
Other Tax Considerations
Beyond income tax and VAT, there are other tax aspects to consider:
- Vehicle Excise Duty (VED): Currently, pure electric vehicles are exempt from VED, also known as road tax. However, this exemption ends in April 2025, after which EVs will be taxed like conventionally fuelled vehicles. New zero emission cars registered after this date will pay the lowest first year rate, and a standard rate from the second year of registration.
- Congestion Charges: EVs are also currently exempt from congestion charges in Clean Air Zones (CAZs), but this is set to end in December 2025.
- Benefit-in-Kind (BIK): There is no BIK charge for electricity because it is not considered a fuel. However, if your employer reimburses you for charging a company car at home it is a taxable earning. If an employer pays you to charge your own vehicle, you will be taxed on the cost incurred by your employer.
- Mileage Allowance: You can claim a flat mileage rate of 45p per mile for the first 10,000 business miles, and 25p per mile thereafter. Additionally, if you’re driving your own electric car on business, you can claim 5p per mile for each passenger you take.
- Charging Points: You can claim 100% capital allowances for the cost of electric vehicle charging points for your business. If there is private use, the charging point may need to be separately pooled for capital allowance purposes.
Key Points for Sole Traders
- 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 are not eligible for the 100% first-year allowance.
Private Use: If you use your vehicle for personal as well as business use, the amount of allowable costs you can claim will be reduced. - Leasing: Leasing an EV does not offer the same capital allowance benefits but you can deduct monthly lease payments from your profit.
- VAT: You can not claim VAT on the purchase of a car, but 50% of the VAT on leasing costs is recoverable.
- Records: Keep accurate records of both business and personal use of the vehicle to support your tax claims.
Professional Advice: Always seek advice from a qualified accountant to ensure that you are making the best choices for your specific circumstances and maximising all available tax reliefs.
Balancing Charges
When you sell your electric vehicle, you might have to pay a balancing charge. This effectively claws back some of the tax relief you initially received. The amount depends on the sale price of the vehicle and the percentage of business use at the time of the sale.
By understanding these tax implications, you can make well-informed decisions and ensure that your move to an electric vehicle is as financially beneficial as possible. If you have any further questions it is always best to seek professional advice.