Ben Fleetwood’s EV Market April Update: Tax, Benefits & the Company Car – Electric versus Petrol

So, over to you, electric vehicle expert guy!

“In November 2020, Boris Johnson announced that new cars and vans powered wholly by petrol and diesel will not be sold in the UK from 2030, which to many is a long way off….but I remember when the London Olympics was announced it seemed like a long way away but it’s now ten years ago!

“There are significant benefits to take advantage of right now. Historically, the company car was a nice benefit of the job, but over the last 25 years, the government has raised the taxable benefit (in kind) of having a car to the extent that it’s no longer sensible to have a company car – the associated benefit in kind was just too high.

“There are 3 factors to take into consideration when looking to either lease a vehicle personally or through a business. The most important factor of them all is the Benefit in Kind (BiK). Over the past 20 odd years, we have seen BiK gradually climb higher and higher, where it has now got to the point where leasing either a petrol or diesel vehicle through business is much more expensive than the personal route. Up until now.

“In April 2020, new rules came in to play where the BiK taxable rate for electric vehicles was 0%, it increased the following year to 1% and it has just now moved up to 2% where it will stay for the next 3 years.

“Benefit in kind is the company car tax that we are obligated to pay if we have the use of a company vehicle. The BiK rate is decided on the tailpipe emissions of the vehicle, the lower the better, hence why EV is the most cost-effective choice. On the other hand , you would be surprised at the rate of BiK for a Golf GTD, at 36%.

“The next question is, what is the financial difference between 2% and 36% BiK?

“If we took the RRP value of a VW Golf GTD and the electric equivalent, VW ID.3, then take away the first registration fee and first year’s road tax, we are presented with the P11d value of the cars. This is the number used alongside the taxable rate, to calculate the BiK due on the vehicles over the year or month.

“The Golf GTD has a P11d value of £35,060.00 and the ID.3 £35,780.00. We then apply the taxable rate. The Golf GTD has a taxable rate of 36% due to the emission being at 136 grams of CO2 per Km, which moves the cost to £12,621.60; and the ID.3 has a taxable rate of 2%, as it emits zero emissions, making the cost £715.60.

“Your income tax rate will then be applied to this amount, so if you are a 20% income tax rate payer, the annual benefit in kind cost for the GTD becomes £2,524.32 or spread over 12 months, £210.36 per month. Alternatively, the ID.3 has an annual BiK cost of £143.12 or spread over 12 months at £11.93 per month. If you are a 40% income tax rate payer, these amounts will double.

“Up until now we have been focusing solely on BiK, but that is because it is important to understand how it works before we can look at the benefits available.

“The next factor to consider are capital allowances. As a company leasing a vehicle, be it electric or not, you could potentially be able to offset your pre-VAT payments against your taxable profits. To stress, this doesn’t mean the total cost of the lease is wiped out, more so the necessity to pay the capital allowances on the would-be profits. CO2 emissions are also a factor in this though, as vehicles are pooled into 3 groups named, first year allowances (zero grams of CO2 emitted), main rate allowances (up to 50 grams of CO2 emitted), and the special allowances (over 50 grams of CO2 emitted). When applying capital allowances to a leased vehicle, 100% of the corporation tax on taxable profits could be offset against the pre-VAT cost of the lease, if it falls in to the first year or main rate allowance groups. If the vehicle falls into the special rate allowance, only 85% of the corporation tax on taxable profits can be offset.

“This brings us on to our last point which is, if you are using the company vehicle for any personal use, you could be able to claim back 50% of the VAT of the vehicle cost and 100% of the VAT for the maintenance cost, assuming you are VAT registered in the relevant sense.

“Now that we know all of this, let’s put it in to practice. Let’s go back to our GTD and ID.3 examples. Were you to lease a GTD over 3 years, you could expect payments of around £430.00+VAT per month. The ID.3 comes in more at £545.00+VAT per month. So far, the GTD is looking the better option, would you agree?

“Next, let’s work out how much VAT will be paid once a portion of it has been paid back. As mentioned, with some personal use, we can claim back 50%. The GTD unclaimable VAT is £43.00 and the ID.3s is £54.50. We will put these numbers aside for a moment and will come back to them shortly.

“How much can we save with capital allowances? Assuming that we can save 19% corporation tax, with taxable profits to offset the full amount, the GTD falls into the special rate allowances pool, meaning that we can save 85% of the corporation tax on taxable profits. This means a saving of £69.44 off the £430.00 equals £360.55. Let’s now add on the unclaimable VAT to make it £403.55 total cost to the business.

“Let’s do the same now for the ID.3. The ID.3 emits zero tail pipe emissions, meaning that we can claim 100% of the capital allowances. This means a saving of £103.55, which when deducted off the monthly cost becomes £441.45. Adding on the non-reclaimable VAT then makes the total cost to the business £495.95 per month.

“The GTD is still looking the better option from a monthly lease cost point of view by nearly £100 per month. But now, let’s look at the cost of the car to both the business and the driver of the car. The total amount payable for the GTD when looking at the lease cost and the BiK, for a 20% income tax rate payer, is a huge £613.91, whereas the ID.3 comes in with a total amount of £507.88 per month. Suddenly the ID.3 has become over £100 less per month than the GTD. When looking at the cost as a 40% income tax rate payer, the gap grows even bigger. The GTD total monthly cost becomes £824.27, but the ID.3 is just £519.81.

“Finally, as a disclaimer, I’m not an accountant and every business is different, so please do not use this as a tax advice. I must stress for you to speak to your accountant before making any vehicle leasing commitments so that you can fully apply the relevant rules to your company and circumstances.”

For further reading to help you decide on choosing an electric vehicle for business use, our B4 Platinum Members, Wellers, have kindly provided links to a number of blogs below:

https://www.wellersaccountants.co.uk/blog/electric-vehicles-are-a-cost-effective-business-travel-solution

https://www.wellersaccountants.co.uk/blog/the-financial-benefits-of-electric-vehicles

https://www.wellersaccountants.co.uk/blog/electric-vehicles-are-they-practical-and-viable

https://www.wellersaccountants.co.uk/blog/why-purchasing-an-electric-vehicle-makes-business-sense

https://www.wellersaccountants.co.uk/podcast/electric-vehicles-in-the-uk

Next month, Ben will be looking at EV battery technology including recycling of old batteries, battery life expectancy and charging.