Understanding VAT and electric cars

Input tax recovery for road fuel is already complicated as the business needs to take account of private motoring. Historically, VAT on road fuel costs can either be recovered where detailed mileage records are kept to record business and private motoring to ensure only that used for business mileage is claimed, or where the VAT fuel scale charge is applied to account for private use.

The advent of electric vehicles (EVs) has introduced more variables into the mix. First, an EV may be charged at several locations: a charge point at the business premises; a charge point at home; or at a third-party site (eg, a public car park, a service station or perhaps another business). Second, the VAT rate for electricity varies depending on whether it qualifies as a reduced-rate supply (eg, domestic use, de-minimis use, charity non-business use, etc).

HMRC sought to clarify its position on the VAT liability of charging of EVs in Revenue & Customs Brief 7 (2021) (RCB 7 (2021)) published on 25 May 2021. This stated that EV charging through charging points in public places should be charged at the standard rate of VAT and set out the circumstances in which an input tax claim could be made for charging EVs.

Following representations made to HMRC and HM Treasury on the limited options for reclaiming VAT on the cost of charging EVs, HMRC issued Revenue & Customs Brief 1 (2022) (RCB 1 (2022)) on 6 January 2022 stating that it is considering the situation where an employee is reimbursed by the employer for the actual cost of electricity used in charging an electric vehicle for business purposes to determine what evidence can be provided, to allow the employer to claim the related VAT subject to the normal rules. HMRC is also considering other simplification measures that may reduce administrative burdens in terms of accounting for VAT on private use.

Issues with HMRC’s policy

The main difficulties appear to be:

• the VAT rate to be charged for supplies of electricity from public charging points;
• the deductibility of input VAT by employers against employee mileage claims for use of private or company EVs; and
• the possible application of scale charges for the private use of EVs where input VAT has been recovered by the business for all use.

The VAT rate for public charging points

The rate of VAT applicable to public charging points is not within the scope of the review announced in RCB 1 (2022). Businesses and business representatives had called upon HMRC to confirm that supplies of EV charging at charging points in public places should be charged at the reduced rate of VAT.

However, RCB 7 (2021) stated that the standard rate should apply as the de-minimis rule could not apply as these supplies are made at various places such as car parks, petrol stations and on-street parking – not to a person’s house or building.

If government policy is to encourage take-up of EVs, the simplest approach would be for HMRC to extend the existing treatment of domestic electricity tariffs to commercial EV charging points, such that supplies from these points would always be subject to VAT at 5%.

In this scenario, it would then be possible for drivers to recharge their EVs at 5% VAT, rather than petrol or diesel at 20% VAT, whether they were charged at home or at a commercial car charging point.

There is a historic precedent for car fuel being supplied at different rates of VAT. Prior to the higher rate schedule being abolished on 18 June 1979, diesel was subject to standard rate VAT whereas petrol was subject to higher rate VAT.

Input tax recovery

Where a company EV is charged at the employer’s premises, RCB 7 (2021) sets out two possible methods for input tax recovery (subject to the usual rules for recovery of input tax):

• recover the full amount of VAT for the supply of electricity used to charge the EV and make an output tax charge for the private use; or
• recover VAT only on the business element.

From a practical perspective, this means that EV charge points must be separately metered to identify the electricity consumed by the EV charge points from that used by the business as a whole. Mileage records also need to be kept. Furthermore, an EV charging point at a business premises might be used by a variety of users (eg, employees to charge either company vehicles or their own vehicles, and business visitors). HMRC’s guidance should give clear examples setting out these scenarios and the records it would expect to see alongside what can be claimed.

RCB 7 (2021) suggests that input VAT is not recoverable by the employer where the electricity is paid for by an employee charging an EV at home because the supply of electricity is to the employee, even if the EV is used for a business trip. Comparisons can be drawn to the argument put forward by the European Commission in its case Commission v UK (case C-33/03), resulting in the practical solution from HMRC that an employee should obtain a petrol receipt to give to the employer when submitting an expense claim from 1 January 2006 onwards to enable the business to recover the input VAT on the fuel originally purchased by the employee.

From an expenses and benefits perspective, employers can reimburse employees up to 45p per mile for the first 10,000 business miles travelled in their own vehicle and 25p per mile thereafter. This rate applies regardless of fuel type. Where employers do not provide fuel for a company car, there is a special advisory fuel rate of 5p per mile for reimbursement of business mileage in EVs.

The tax rules for EVs are generous:

• a low benefit in kind charge (with no additional charge for the installation of EV charge points and recharging the vehicle at work);
• first-year allowances for EVs and EV charge points; and
• a tax exemption for employees recharging all-electric or plug-in hybrid vehicles at or near the workplace.

By contrast, it is unfortunate that the input VAT treatment for EVs is so restrictive compared with traditional road fuels.

Scale charges to account for private use

A further issue potentially arising is the application of a scale charge to account for output VAT on the private use of EVs. Scale charges may be viewed as a simplification, but from a policy perspective, to encourage the use of EVs it would be better to allow VAT recovery in full.

Should HMRC make the policy decision to apply a scale charge for EVs, this should be at the 5% VAT rate, as the rate applicable to the domestic use of electricity and consistent with the VAT rate applied to electricity used for charging EVs at home.

Summary

An appropriate balance needs to be established when considering the general objective of encouraging use of EVs rather than traditional road fuels, such as petrol or diesel. I would therefore advocate:

• electricity purchased from public EV charging points being subject to VAT at 5%;
• allowing input VAT recovery on business mileage claims at 5% (whether the vehicle is a company car or the employee’s own EV) without the need for a VAT invoice or receipt to be retained as evidence; and
• no VAT scale charges for EVs.

About the author

Neil Gaskell, VAT manager, Tax Faculty