With the government’s aim to reduce emissions (which will culminate in a ban on new petrol or diesel cars 2040, as announced by Theresa May’s government a couple of years ago), there is an ongoing push for the use of electric, hybrid and other low emission vehicles and tax breaks form part of this strategy.
In this article we look at the tax treatment for businesses, as well as employees (including directors).
Capital allowances is the practice of allowing a business to get tax relief on tangible capital expenditure (e.g. cars, vans, equipment etc.). It is essentially known as the tax man’s version of depreciation, and writes off a percentage of the value of the item against taxable profits, each year, unless the Annual Investment Allowance (AIA) or First Year Allowance (FYA) apply.
Businesses can deduct the full value of an item that qualifies for the AIA against profits. Most capital expenditure is eligible for the AIA, though cars are not (but vans and other commercial vehicles are). The current AIA stands at £1 million of qualifying expenditure per year.
Businesses can alternatively deduct the full value of an item that qualifies for a FYA. Broadly, certain environmentally friendly items are eligible. FYAs do not count towards the AIA limit.
Until April 2021 low or zero emission cars can qualify the FYA if CO2 emissions do not exceed 50g/km and the car is purchased new and unused. The FYA also applies for zero emission vans, but as commercial vehicles qualify for the AIA, this special FYA for zero emission goods vehicles is not needed by the majority of businesses.
Where cars are leased, the cost of the lease is deductible from the business profits. The deduction is restricted by 15% if the car has high CO2 emissions, being over 110g/km for leases commencing on or after 1 April 2018 for companies and 6 April 2018 for sole traders and partnerships.
This restriction therefore doesn’t apply to electric or low emission cars, and the full cost of the lease is deductible.
In a company, if a vehicle is used privately as well as for business use, it will be subject to a benefit-in-kind. See the employees (including directors) section below. This also applies to employees of a sole trader or partnership.
In a self-employed/sole trade or partnership, if a vehicle is used privately by the owner/partners, the capital allowance or expense deduction needs to be apportioned accordingly. For example, if a vehicle is used 75% for business and 25% privately, then only 75% of the capital allowance or expense is deductible from profits for tax purposes.
Employees (including directors)
Company cars have long been used by businesses to reward and retain staff as an extra perk on top of a standard salary. Unfortunately HMRC is aware of this kind of incentive and levies tax on them. This company car tax is called Benefit-In-Kind (BIK) tax. This is calculated by taking the list price of the car and multiplying it by a percentage.
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 the current 2019/20 tax year, low emission cars (up to 50g/km) are taxed at 16% of list price, or 20% for diesels. As electric cars tend to be more expensive than similar-sized petrol or diesel cars, this tends to discourage employers from providing electric-only company cars.
From 6 April 2020 the policy is being changed to 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.
The tax year 2020/21 will be much more tax efficient 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 if registered before 6 April 2020, and 0% if registered after 6 April 2020.
Please contact us to find out how the above applies in your circumstances and how you can reduce your tax liabilities and maximise your tax efficiency.
Please note that the above is for general information only and does not constitute financial or tax advice. You should not rely on this information to make or refrain from making any decisions. You should always obtain independent professional advice in respect of your own situation.