Promoting the adoption of electric cars

The last few years have seen dramatic changes in the development of cars. Diesel cars are now known to be bad for air quality. There’s been a lot of negative press coverage, and the tax rates are set to rise for fossil fuel company cars. Sales of new petrol and diesel cars will be banned in the UK from 2030.

On the other hand, companies such as Tesla and Nissan are developing electric cars aimed at the mainstream car market. These cars are becoming more affordable, with greater mileage ranges as battery technology improves.

In April 2020, to encourage the take-up of electric cars, the car benefit charge based on the car’s list price for providing an electric company car dropped from 16% to 0%. With the 100% deduction for the costs of purchasing or leasing, buying it through your limited company will save you tax and provide you with the cheapest way to own an electric car.

There are two separate tax issues with a company car:

 * Firstly, the initial costs to purchase or lease the vehicle – how much can you offset against your corporation tax bill?

 * Secondly, you’ll have to pay extra tax each year because you’re getting a “benefit in kind” from the company (using the company’s car) instead of your own.

Company car meaning:– while ‘company car’ is the familiar phrase used for a dentist operating through their own limited company, and used through this article, a more appropriate term may be ‘employer-provided car’. The same rules apply If you are an employed dentist working for a sole trader, partnership or limited liability partnership.

Self-employed meaning:– Unfortunately, the figures don’t stack up if you are a self-employed dentist. By self-employed, I mean working as a sole trader, partner in a partnership or as a member of a limited liability partnership. Self-employed dentists reduce their motoring costs for any private use. Due to the small % of business miles driven by dentists, the tax-deductible costs are significantly reduced. Remember, driving from home to practice is not considered business use.

Company tax relief when you ‘’purchase’’ an electric car

For new fossil-fuelled vehicles or hybrid cars, a business can only claim 6% of the cost of the vehicle against tax each year.

However, your company can claim the total 100% cost of a new and unused fully electric vehicle as a tax deduction in the year you buy it. It is important to note that the car needs to be new or an ex-demonstrator and first registered to the company. The sales income will be 100% taxable when the new vehicle is sold. Second-hand electric do not qualify for a full tax deduction.

Second-hand electric cars can claim 18% of the cost of the car year on year on a residual value basis. When the vehicle is sold, a balancing allowance can be claimed.

Corporation tax will rise to a top rate of 25% from April 2023, and you might consider delaying your purchase to save tax at a greater rate.

See the worked examples below to see why there is minimal benefit in delaying your new electric car purchase until after April 2023. Surprisingly there is a tax planning opportunity to give an overall better tax result by using the 18% rate applied to second-hand vehicles to delay tax relief until the 25% rate kicks in.

Example 1 – purchase of a new electric car with 100% allowance pre-April 2023 tax rise:

The company buys an electric car costing £30,000. You reduce your company’s next tax bill by an impressive £5,100 (19%), so the effective net cost of the car is £24,900.

The company sells the car after three years for £10,000. The company has a tax to pay of £2,500 (25%).

Over the three years, the net cost is £17,400.

Example 2 – purchase of a new electric car with 100% allowance post-April 2023 tax rise:

The company buys an electric car costing £30,000. You reduce your company’s next tax bill by a more impressive £7,500 (25%), so the effective net cost of the car is £22,500.

The company sells the car after three years for £10,000. The company has a tax to pay of £2,500 (25%).

Over the three years, the net cost is £15,000

Example 3 – purchase of a new electric car without 100% allowance pre-April 2023:

Before April 2023 and the pending 25% tax rate introduction, the company buys a new electric car costing £30,000.

The company knows it doesn’t have to claim at the new car 100% rate for new electric vehicles, and it restricts its claim to the 18% used for a second-hand electric vehicle.

It can claim costs of:

£5,400 (18%) in year one saving £1,028 (19%)

£4,429 (18%) in year two, saving £1,107 (25%)

£3,360 (18%) in year three, saving £840 (25%)

The company sells the car after three years for £10,000.

Cumulative allowances of £13,189 have been claimed. The company will claim a balancing allowance of £6,811 (£30,000-£13,189-£10,000), saving a further £1,702 (25%).

Over the three years, the net cost is £15,323.

By not claiming the 100% rate and using the 18%, the company saves an additional £2,077 in tax.

Example 4 – purchase of a used electric car:

Second-hand electric do not qualify for a full tax deduction. Second-hand electric cars can claim 18% of the cost of the car year on year on a residual value basis.

The company buys a used electric car costing £10,000.

It can claim costs of:

£1,800 (18%) in year one saving £342 (19%)

£1,476 (18%) in year two, saving £369 (25%)

£1,120 (18%) in year three, saving £280 (25%)

The company sells the car after three years for £5,000.

Cumulative allowances of £4,396 have been claimed. The company will claim a balancing allowance of £604 (£10,000-£4,396-£5,000), saving a further £151 (25%).

Over the three years, the net cost is £4,858.

Company tax relief when ‘’leasing’’ an electric car

If you lease a new electric vehicle, you can claim the total cost of your lease payments each year.

Example 5 – leasing an electric car:

The company pays £3,600 in lease payments in one year. You will save £684 (19%) in tax every year you lease the car.

It makes no difference to the tax deduction if the car is new or used when leasing.

Leasing used to be less attractive due to the fixed term of a lease. If you have a change in circumstances, you have to keep paying the fixed cost of the lease or suffer an expensive early exit penalty.

However, leasing options now allow the company to cancel the lease without a cost to the employer. These are more expensive than standard leases.

Low benefits in kind

As a dentist, you usually use your company car; it will commute to and from work. Commuting to and from a place of work is considered to be a private journey. HMRC will expect you to pay extra tax and national insurance because you’re getting a “benefit in kind” from the company for your private (non-business) use of the car.

However, the electric car benefit rate is meagre compared to cars with CO2 emissions. This means you can provide a vehicle yourself that can be used by you, your partner or your children with just a tiny additional tax to pay. The taxable benefit is currently 2% until March 2025, rising from 2025, but with yearly increases capped at 1% until 2028 to keep rates low.

Here’s an example of what your new tax bill might be at the 2% rate:

Example 6:

You buy a new electric car, and the list price is £30,000

The amount of your benefit is £600 (£30,000 x 2%)

You pay £120 tax as a basic rate (20%) taxpayer

The company pays £90.30 national insurance (15.05%)

The total annual tax cost is £210.30

You’ll need to pay this tax every year you have a car.

You must file company forms (P46 car and P11D) with HMRC each year to calculate and pay the tax.

Motoring costs

The company will pay all motoring costs without giving rise to any further taxable benefits.

In addition to the costs of the car, the company can pay for all the car’s running costs. These include:

 * maintenance, services and repairs, including accidental damage

 * battery and all other part replacements

 * insurance – remember to insure as an employer-provided and not a personal car

 * MOT after three years old

 * washing, cleaning and valeting

 * finance charges and interest on loans

 * vehicle excise duty from April 2025

 * no tax relief for parking fines, but as they are for a company vehicle, they are a company cost

 * any penalties and fines issued to the driver, e.g. speeding, must be paid for personally.

If paying these costs from the company total £1,000 a year, you will save £190 (19%) corporation tax.

Remember, electric cars do not have to pay congestion and clean air charges.

Keeping mileage records

You can claim a mileage allowance of 8p a mile for electric vehicles for business journeys.

If range anxiety is an issue and you have another petrol or diesel privately-owned car, you use it for business travel. You can continue to recharge the company the 45p a mile for business journeys in that car.

Looking for help and advice on owning an electric car?

Simply phone us on 020 4577 1565 and one of our friendly Dental Accountants will be happy to help.