Caring for the environment has become an ever more important issue for businesses in recent years. Showing green credentials can be a great advertising point whereas failing to address environmental issues can lose customers instead.
For similar reasons, the government are also keen to encourage more green practices. This is good news for business, as this has led to them introducing several policies that offer cost or tax savings for those taking environmentally responsible actions. In this article I will cover the potential financial benefits of switching to an electric car.
Vehicle Excise Duty (VED)
Every year most vehicle owners will have to pay VED. For many years now, the amount that is due has been mostly based on the CO2 emissions, in grams per kilometre (g/km), of the vehicle. The higher the emissions, and hence the more polluting the vehicle, the higher the VED. When this method of calculation was first brought in, cars with low emissions were exempt from paying VED. Though such vehicles still benefit from a lower charge than others, the exemption is now solely reserved for cars with no emissions at all. Switching to an electric car can thus eliminate this cost entirely.
Benefits in Kind
When an employer gives an employee something other than cash, this will normally be considered a benefit in kind. Such benefits in kind will be subject to tax and National Insurance based on the value of what has been supplied. One of the most common benefits in kind is the provision of a company car.
For cars the amount that is subject to a benefit in kind is based on a percentage of the list price of the car. Again, the percentage applied is largely based on the CO2 emissions of the vehicle. Cars producing the highest emission levels of over 185 g/km attract an eye-watering 37% rate. By contrast, the current rate in place for electric cars is only 13%. As employers must pay additional employer’s National Insurance on benefits in kind, operating an electric fleet benefits both them and their employees. This is in sharp contrast to those diesel cars that don’t comply with the RDE2 low emissions criteria. They already tend to have higher charges anyway, but they also face a 4% surcharge on top of the normal benefit in kind rates.
Currently this 13% rate applies to all electric cars. However, it is currently proposed that different rates will apply from 6th April 2020. From that date electric cars with no emissions, and those with low emissions and a range of over 130 miles, will only be subject to a benefit of 2%. Rates for other electric cars with low emissions will increase from this, with those having a range of less than 30 miles being subject to a rate of 14%. Anyone switching to an electric car therefore needs to check on the expected range.
When a company buys an asset that will be used over several years, it is not considered an ordinary expense that can be set against taxable income in full. Instead, the cost is claimed through capital allowances in an adjustment on the business’ tax return.
Most assets are eligible for being included in the annual investment allowance (AIA). This allows a business to claim the full cost of assets in the year of purchase up to a maximum annual allowance. Up to 31 December 2018 this was £200,000, but this has increased to £1,000,000 from 1st January 2019. This will cover most business assets, but cars have always been excluded from this.
Instead, cars are normally subject to a restricted claim of 18% per year, reduced to 8% for high emissions vehicles. However, cars that have CO2 emissions below 75 g/km qualify for first year allowances instead. This means that 100% of the purchase price can be claimed but this claim does not count towards the limit for AIA. The level of CO2 emissions required to be eligible for this is likely to drop in future years, so any plans to replace cars in the future should take this into account.
Electric charging points for cars are also eligible for these first year allowances.
It is a cardinal rule of business that the tax consequences should not be the sole driving force behind any business decision. That said, if a business is planning to purchase new cars in any case then possible tax savings are definitely a factor that should be worth considering. If you can save tax at the same time as helping save the environment, then it could be a win-win proposition.
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