As a business owner you may be looking at ways to extract funds from your business. Company cars used to be a common method of doing that but over recent years the tax charged has made them unattractive.
But that is changing if you are happy to have an electric car.
What is a company car, how do they work?
A company car is one owned by a business and provided to an employee for their use.
It is expected that any vehicle given to an employee will have personal use and therefore there is a tax charge.
Income tax for the individual and National Insurance for the company.
How is the tax on a company car worked out?
The tax charge (benefit in kind that is declared on a P11d form) is based on the CO2 emissions and the cost price of the car.
What is the benefit-in-kind (BIK) for electric cars?
As when purchasing any car through a company, as soon as the vehicle is used for personal travel, a BIK will arise. Unlike petrol and diesel cars however, electric cars have a much lower BIK tax rate.
For the 2021/22 tax year, the BIK rate for all zero-emission vehicles is 1%. This is due to rise to 2% for the 2022/23 tax year, but there are still significant savings to be made when compared to petrol or diesel cars, which can attract a BIK rate of up to 37% depending on their emissions.
Tax on BIKs must be paid by both the company and the employee, therefore be aware that if you are a sole director of your own limited company, you will have tax to pay from your company as well as from through your personal tax return.
To calculate how much tax the company will pay for providing an electric car to an employee as a BIK, you will need to use the formula:
P11D value (the value of the electric car) x BIK rate based on CO2 (2% as set out by the government in 2022/23 tax year) x 15.05% (the rate of Class 1A National Insurance contribution payable by employers after the increase of 1.25% due to the social care levy – previously 13.8%).
Using an example of a Tesla worth £60,000, the company would calculate 2% of this value (£1,200) and multiply it by 15.05%. The company would pay £180.60 in tax every year the car is available as a BIK to the employee.
To calculate how much tax the employee will need pay as a result of receiving an electric car as a BIK will be dependent again on the P11d value, the BIK rate and the employee’s personal income tax band. You would use the formula:
P11D value (the value of the electric car) x BIK rate based on CO2 (2% as set out by the government for 2022/23) x employee’s income tax rate
Using the same example of a Tesla worth £60,000 the employee would pay the following tax depending on their income tax band:
- Basic rate taxpayer at 20% would pay £240 in tax each year
- Higher rate taxpayer at 40% would pay £480 in tax each year
- Additional rate taxpayer at 45% would pay £540 in tax each year
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:
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).
From 1 April 2021, pure zero-emission cars can qualify for 100% first year allowance if the car is purchased new and unused. This means that the entire cost of the electric car is deductible from profits before tax (with no caps limiting the value of the vehicle to be eligible for this allowance). The first year allowance is another type of capital allowance and is generally applicable to plant and machinery, as well as energy-saving equipment. Commercial vehicles already qualified for 100% relief under AIA.
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.
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).
The asset is, “depreciated” over its economic life in the accounts. The depreciation and any interest are deductible expenses. Say the car cost £50,000 and the useful economic life is determined to be 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).
Furthermore, since 1 April 2021, a new super-deduction was introduced. This type of capital allowance enables qualifying plant and machinery to receive a 130% deduction from profits before tax. The super-deduction can be claimed if you invest in an electric vehicle charging point for your business; however, it will only be available until 31 March 2023.
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.
Can you claim back VAT on electric cars?
The usual rules apply when it comes to claiming back VAT payments on cars purchased through a company, regardless of whether it is electric or fuel-run. The only time you can claim back VAT is when the car is solely being used for business purposes and has no personal usage. HMRC are often sceptical of this claim, so ensure that you have sufficient evidence if this is the case.
In comparison, were you to lease and not purchase an electric car instead through your company, you would be able to reclaim 50% of the VAT from the lease payments, even where there is some personal use. Where the leased electric car is exclusively used for business, 100% of the VAT can be reclaimed.
If you have purchased an electric van or motorcycle through your company that is solely for business purposes then 100% of the VAT can be recovered. If there is any significant personal use then you will need to adjust for a proportionate amount of VAT to be claimed.
Bottom line though, why not just buy an electric car myself?”
Let’s take an example:
Beth is a marketing agency who operates through a limited company. She’s considering buying an electric car, mostly for private use. She plans to spend £50,000 on the car and is a higher rate taxpayer.
- Option 1: Beth has her company declare a £50,000 dividend which she uses to buy the car. She pays tax at 33.75% on the dividend. That costs her at least £16,875 in income tax.
- Option 2: Beth has her limited company buy the car. There is no dividend tax to pay so he’s saved £16,875 right off the bat. She can also claim capital allowances which save her £9,500 in corporation tax. Income tax on the benefit will be just £400 for 2022/23 and the company benefit cost is £150.05. So, all in, Beth is £25,924.95 better off buying in the company than buying herself – more than half the value of the car.
Please note this is an example and the savings depend on the value of the car, the rate at which the individual pays tax, whether it qualifies for capital allowances and the benefit percentages are subject to HMRC change.