Energy regulator, Ofgem, recently revealed that one in four of us plans to buy an electric vehicle in the next five years, which might go some way to explaining the increase in client queries about buying hybrid or electric cars through businesses.

Fuelled by further announcements of investment to support electric transport and 1,800 ultra-rapid charging points at motorway service areas, and with various car manufacturers committing to selling only electric cars from as early as 2025, I thought now would be a good time to steer you in the right direction if you are baffled and bemused by the myriad of company car tax rules.

It’s worth saying up-front that the whole tax regime is set up to discourage people from buying gas-guzzling vehicles through companies. As a very general rule of thumb – if you’re going electric, it’s probably worth purchasing a car through your business and that’s what I’ll focus on here.

Trading status

The distinction between being self-employed, a partner, or owning a company is an important one in company car considerations. It is a lot simpler if you are self-employed or a partner because you can generally offset the business use proportion of any car costs, and you should be able to get some tax relief on the purchase cost if the car is bought by the business.

Benefit-In-Kind

If you operate as a limited company and the company owns the car, you will personally have a Benefit-In-Kind (BIK) to pay which is based on the P11D value of the vehicle, its emissions, and your income tax band. The BIK is a generously low 1% for pure electric cars this year, increasing to 2% from 2022/23 and fixed at this level until 5 April 2025, and your employer can provide free charging at work without any BIK. However, if you opt for a hybrid car, the BIK rate will depend on the car’s electric range alone. The further it goes, the less it costs you to drive it in tax terms.

100% tax deduction

From 1 April 2021, a pure electric car can also qualify for a 100% tax deduction in the year of purchase which is an incentive to buy through the company. Just be aware that there is a potential sting in the tail as any proceeds on a sale will be taxable and the corporation tax rate is due to increase to 25% in 2023.

To buy or to lease?

Having established the level of any BIK, the next decision you need to make is whether to buy or lease the car. Electric car buyers will get the 100% allowance upfront, whilst writing down allowances of 18% will be available to purchasers of cars with emissions of 50g/km or lower, or 6% otherwise. These allowances are pro-rated for the percentage of business use if you are a sole trader or partner.

If you decide to lease, understanding the nature of the lease is critical; hire purchase is generally akin to buying the car, whereas for a straightforward lease you would normally just deduct the lease payments, adjusted for business use percentage if not through a company.

Business and personal mileage

How many miles you travel and the split between business and personal mileage is another important part of the equation because you need to factor in paying for fuel or charging, which differs between personal and company ownership.

The big (complicated) picture

There are lots of wider considerations to factor into what is a commercial decision; first and foremost, what sort of a deal are you getting on the vehicle, how long are you intending to keep the car, what is the resale value like, will you need to pay for a charging station at home and what are your likely on-going running costs for insurance, breakdown, and car tax?

All in all, the company car equation is a complicated one to work out, mainly because of the information required to run any meaningful numbers. If you have any queries about potentially buying an electric vehicle through your business, please get in touch with me.

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Kate Naylor
Kate Naylor

Tax Partner

Kate works with businesses and their owners on tax strategies and mitigation, looking at business and personal tax structures to achieve long term goals.

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