Tax treatment of low emission vehicles
Rebecca Cave explains the tax treatment of low emission vehicles. She details capital allowances, benefits-in-kind, the encouragement of hybrids, OpRA, leased cars, electric vans and the cost of charging – as well as the potential of free charging at work.
The government’s aim is to encourage more people to use low CO2 emission or zero emission vehicles and there are a number of tax measures that incentivise that behaviour. However, those tax measures are not all perfectly aligned, as different emissions thresholds and cut-off dates apply for capital allowances, leasing costs, employee benefits and optional remuneration arrangements (OpRA).
This article outlines the various tax incentives for low emission vehicles as they apply from 2019/20.
Cars do not qualify for the annual investment allowance (AIA), even if they have low CO2 emissions. However, the cost of acquiring any commercial vehicles can be claimed under the AIA, so it is important to determine whether a vehicle qualifies as a commercial vehicle for tax purposes. The AIA cap is £1m for purchases made in 2019 and 2020, and will revert to £200,000 on 1 January 2021.
Until 1 April (5 April 2021 for income tax) a low or zero emission car can qualify for a 100% first year allowance (FYA) if its CO2 emissions do not exceed 50g/km and the car is purchased new and unused (s45D, Capital Allowances Act 2001 (CAA 2001)). A similar 100% FYA applies for zero emission vans, where the vehicle is purchased new and unused before 1 April 2021, or 5 April 2021 for income tax (s45DA, CAA 2001). However, as all commercial vehicles qualify for 100% relief under the AIA, this special FYA for zero emission goods vehicles is not needed by the majority of businesses.
Cars with CO2 emissions of between 51g/km and 110g/km are added to the main pool for capital allowance purposes, so attract an annual writing down allowance (WDA) of 18%. Cars with CO2 emissions exceeding 110g/km must be allocated to the special rate pool, where the WDA is 6% from 1 April 2019, from 6 April for income tax (s56, CAA 2001). A hybrid rate of WDA between 8% and 6% will apply for accounting periods that straddle 1 or 6 April 2019.
The percentage of list price of a company car which is taxed as a benefit is determined by the CO2 emissions of the vehicle. For 2019/20 low emission cars (up to 50g/km) are taxed at 16% of list price, or 20% for diesels. The list price includes the cost of any optional accessories but does not include any discount negotiated with the dealer, so the taxable list price may significantly exceed the actual amount paid for the vehicle.
Before 6 April 2015 the taxable benefit of electric cars was nil, but from then on electric cars were banded with other low emission cars, and the appropriate percentage gradually increased from 5% to 16%. As electric cars tend to be more expensive than similar-sized petrol or diesel cars, this change discouraged employers from providing electric-only company cars.
From 6 April 2020 the policy is switched round to once again encourage the provision of electric cars and hybrid vehicles. The appropriate percentages for cars with CO2 emissions of up to 50g/km will take into account the range for which the car can be driven using only electric power (as shown in the table).
The tax year 2020/21 will be the sweet spot for buying an electric company car, when 100% FYA can be claimed by the purchaser and the employee will be taxed on only 2% of the vehicle’s list price. However, government policy regarding electric company cars beyond 2021 remains uncertain.
OpRA out of sync
Where an employee has a car provided under an OpRA, the benefit is valued as the amount of salary given up, not as the appropriate percentage of the list price of the car. However, the OpRA rules do not apply if the company car has CO2 emissions of less than 75g/km. This is a different definition of low emissions from that used for capital allowances.
Where cars are leased the amount of deduction which would otherwise be allowable is reduced by 15% if the car has high CO2 emissions. In this case the threshold for ‘high’ is aligned with that for capital allowances, being over 110g/km for leases commencing on or after 1 April 2018 (6 April 2018 for income tax).
The taxable benefit for having the private use of an electric van is gradually being aligned with that for ordinary vans. In 2019/20 the taxable benefit for using a normal company van is £3,430 and the benefit for an electric van is 60% of that figure: £2,058. In 2020/21 the electric van will be taxed at 80% of the benefit for a normal van, and in 2021/22 at 90% (s115(1C), Income Tax (Earnings and Pensions) Act 2003). There is no taxable benefit at all if the van is only used for business journeys and ordinary commuting.
Cost of charging
Where the employer pays for the cost of charging the company-provided electric vehicle there is no taxable fuel benefit for the driver, as electricity is not classified as a fuel for the car or van benefit regulations.
Where the driver of the electric vehicle pays for the electricity to power it, either from their domestic supply or by charging at a roadside station, the employer may reimburse the employee for that cost. With a roadside charge it is easy to see what the total cost is, but it is not so easy to calculate the cost per mile when charging from a domestic supply.
This problem has been solved from 1 September 2018, as the employer can pay the company car driver 4p per mile, to reimburse them for the cost of the electricity used for business journeys, with no tax implications. This rate only applies to company-owned electric cars, not to private vehicles.
Where the employee uses his or her own electric car for business journeys the company can pay the normal tax-free mileage allowance to the individual of 45p per mile for the first 10,000 miles driven in the year, with additional business miles reimbursed at 25p per mile. The driver may also claim the passenger rate of 5p per mile for every person he or she takes on the same business journey.
Free charging at work
From 6 April 2018, where the company allows employees to charge their own electric vehicles at the workplace, there is no taxable benefit for the provision of that free electricity.
For this tax exemption to apply, the charging facilities must be provided at or near the workplace, which is the same requirement that applies to tax-free workplace parking. This tax exemption does not apply if the employer reimburses the costs of charging the employee’s own vehicle away from the workplace, such as at a motorway service station.
In common with other workplace tax exemptions, the vehicle charging facilities must be available to employees generally. If there are multiple sites, the employer does not have to provide an electric vehicle charging point at each of them.
Surprisingly the employee does not need to be the driver of the electric vehicle to benefit from the exemption; he or she may be a passenger, perhaps where the spouse or partner has driven the car to work.
Where the business installs charging points for electric vehicles in the period from 23 November 2016 to 31 March 2023, or 5 April 2023 for income tax, it can claim a 100% FYA for those costs (s45EA, CAA 2001). For charging points installed outside of this period the cost would qualify for the AIA.
|Benefit-in-kind charge from April 2020|
||Electric only range
||Petrol hybrid||Diesel hybrid|
|0||All (pure electric)
||130 or more
|1-50||Up to 30
About the author
Rebecca Cave is director of Taxwriter Ltd and consultant tax editor of AccountingWEB