Electric Cars – Are you missing out on a tax benefit?

Magnitude is here to help you negotiate the minefield that is car finance and not only do we use our own experience and expertise but also consult and work with industry leaders which include accounting, legal, and tax specialists. This month we introduce you to UHY Hacker Young Group, as part of our ongoing updates focusing on Electric Vehicles and the tax benefits around owning a vehicle through a company and where you could potentially be leaving yourself exposed to a larger than expected bill from HMRC.

The UHY Hacker Young Group is a top 20 group of UK Chartered Accountants with a far-reaching and comprehensive skills base. They have individuals and member firms with many years’ proven experience in specialist industries and markets. They can advise on all aspects of running a business in the automotive sector and have assisted many of their clients in making long term and positive changes in their businesses. In addition to providing traditional dealer accounting, audit, and tax services, their automotive experience also covers industry-specific financial and operational consultancy projects across the UK and Europe on behalf of institutional lenders and manufacturers.

Tax relief on electric cars has been one of the few positives to come out of 2020. There’s no better time than now to look at your own business and make sure you are taking full advantage while you can!

When you’re choosing a vehicle for your business, you wouldn’t be alone if your starting point is the make and model of the car. However, with the tax relief introduced this year, it may be worth considering looking at tax implications before setting sights on your next vehicle.

Leasing or buying a car can have different tax benefits or implications when you have your own Limited company or trading business. You may just save money by making a more economical choice.

Tax benefits of electric or low emission cars

Currently, HMRC is actively encouraging businesses to give their employees electric or low emission cars. The taxable benefit on a zero-emission car is currently £0!

What this means, is that by providing your employees or yourself, as a Director, with – for example – a Tesla as a company car, there would be no benefit in kind. Depending on how the vehicle was purchased, your business could also get tax relief on the cost.

It’s worth noting that although zero-emission cars have no taxable car benefit in the tax year 2020/21, the electric range of a car is what determines the percentage of other low emission cars to work out the benefit. For example, if you have a vehicle with a list price of £40,000, co2 emissions are 49, and the electric range is 120 miles, the benefit percentage will be 2%. In contrast, if the electric range was only 20 miles, the benefit percentage would be 14%. The difference in tax for a 40% taxpayer, would then be £2,240 over a full year! The cost to the employer is almost £800 more just due to the electric range.

Tax relief on lease or Hire Purchase agreements

If you lease a vehicle rather than purchase one, you can claim 50% of the VAT back and obtain full tax relief on the remaining cost! This means that a monthly rental of £420 (inclusive of VAT), would actually only cost you £311.85 per month.

If you take out a loan or HP agreement, you can claim capital allowances on the purchase of the vehicle, and only claim the interest paid through P&L.

A new low or zero-emission car currently qualifies for first-year capital allowances, meaning the full amount will get tax relief in the year in which you purchase it. Buying a car for £50,000 means it would only cost £40,500 due to the £9,500 corporation tax relief.

VAT and tax treatment on PCP

HMRC’s view on how the VAT and tax treatment on PCP are dependent on the level at which the final optional payment is set. This final payment determines if the VAT is due on the supply of goods or the supply of leasing services. The tax treatment follows the VAT treatment.

It is also relevant whether the vehicle has ownership options, i.e. if you can hand the vehicle back at the end (Guaranteed Future Value) – this could lead to a challenge from HMRC. Whereas a typical Hire Purchase + Balloon option (Non-Guaranteed Future Value), doesn’t present the same risk.

As you can see, there are lots of different options to consider when purchasing a car, so why not think about the tax effect alongside the make and model when picking your next vehicle?*

If you’re looking to take out finance on a vehicle, make sure you check out our finance calculator, alternatively, feel free to get in touch with our team who can guide you to the best deal available to you.

Unsure which electric car is best for you? Take a look at our latest article as we take the Tesla Model 3 and Polestar 2 through their paces.

Many thanks to Clive Gawthorpe of UHY Hacker Young for his expert advice.

*The above details are an overview of tax benefits of owning a zero or low emission car and are for illustration purposes only, professional advice should be taken to look at your specific circumstances.