Contractors' Questions: How to buy an electric vehicle through my limited company?

Contractor’s Question: I’m thinking of buying an electric car, so what are the tax implications of buying this as a company car – i.e. purchasing the electric car through my limited company?

Expert’s Answer: This is a good time to explore the benefits of electrical vehicles. The government has introduced a range of tax incentives for businesses aimed at a net-zero economy by 2050.

Your new eco-car: make and model

If you have not decided on a specific make or model, you can refer to the list of vehicles eligible for the government’s ‘plug-in’ grant. The grant offers a discount of up to £3,000 on the price of an electric car and £350 on the cost of installing a charger.

By choosing an electric car, your company can claim a 100% first-year allowance on the cost of the vehicle provided it is purchased new. This is an enhanced rate of capital allowances which would reduce your company’s taxable profits for the accounting period in which the car is acquired - saving corporation tax at 19%. The claim could also include the cost of installing a charging point.

Dual charges

When the first-year allowance is claimed, it is important to remember that any proceeds from the sale of the car will create a balancing charge and a corporation tax charge on the company.

If the car is made available to you, there will be a taxable benefit in respect of your private use of the car. The value of a company car benefit is calculated by taking the list price of the car and multiplying it by a percentage based on the car’s CO2 emissions.

'Fully electric' = no hybrids

At present, a zero-percent rate applies to cars which are fully electric and do not emit CO2. This is set to rise to 1% in the 2021/22 tax year and 2% in 2022/23 but will remain lower than the rates for petrol and diesel cars, which can be as high as 37%. The lower benefit value also results in a saving of Class 1A National Insurance Contributions for your company.

If the company covers the cost of re-charging your car, there will not be a taxable benefit on you personally as electricity is not classified as fuel. Similarly, there will not be a taxable benefit on you if the company covers the cost of installing a charger at your home.

Recovery, and speed

If you pay for the electricity to power your car, either at home or at a charging point, you can recover the cost from your company. This is straightforward where you receive a receipt from the charging station but not so straightforward when you have to calculate the cost per mile from your domestic bill! In this instance, the company can reimburse you at a rate of 4p per mile for business journeys (the Advisory Electric Rate), without any personal tax implications.

The popularity of electrical cars is expected to grow, with more manufacturers announcing their intentions to become all-electric. Wise advice is to act soon on the tax benefits -- when electric vehicles become mainstream, one-off incentives may no longer be available.

The expert was Guy Sterling, a tax partner with Moore Kingston Smith.

Monday 22nd Feb 2021
Profile picture for user Guy Sterling

Written by Guy Sterling

Guy has been advising on personal tax for more than 20 years. He works closely with trading and professional partnerships advising individual partners on the tax treatment of their income including issues relating to double taxation relief and planning for tax payments.
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