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Tax on electric vehicles

13th Jul 2023
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Allica Bank is Britain’s award-winning business bank focused exclusively on supporting established...
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Electric vehicles (EVs) have long been considered a tax-efficient choice, but recent changes in regulations have brought about some important updates. 

electric vehicle tax
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While other company cars tend to be a costly benefit, accountants have advised their clients over the years about the potential savings offered by going electric. 

We’ll recap what’s new, what’s changing in the future, and whether EVs are still the great tax-saving opportunity they have been to date.

Capital allowances: first-year allowance until 2025

One of the main benefits of purchasing an electric vehicle is the ability to claim first-year allowances. 

Until 31 March 2025, businesses can claim a 100% first-year allowance on EVs, allowing them to deduct the full cost of the vehicle from their taxable profits.

The same allowance applies to businesses installing EV charge points. 

And while cars aren’t eligible for the annual investment allowance or the new full expensing scheme, commercial vehicles like most vans are. (As a side note: vans may also be eligible for the government’s plug-in grant, so it’s always worth checking which category the vehicle comes under.)

Benefit-in-kind: 2% until 2025

Another significant benefit of electric cars is their relatively low benefit-in-kind (BiK) rate. EVs used to be exempt altogether from BiKs, but in 2021, their rate increased to 1% of list price. In 2022, this went up again to 2% of the vehicle’s list price.

This rate will remain at its current level until April 2025, after which it will increase by 1% each year until 2028. In the short term, this allows for easier tax planning – and a much lower rate compared to higher-emissions vehicles. 

Vehicle excise duty: changes in rates

Historically, EVs were exempt from vehicle excise duty (VED or ‘road tax’), and their popularity boomed as a result. In 2022, battery electric vehicles made up almost 17% of all sales, surpassing sales of diesel cars for the first time. 

From 2025 onwards, however, the government will require EVs to pay the same VED rates as petrol and diesel vehicles.

Advisory electric rate: quarterly updates

Earlier this year, HMRC confirmed it was changing its methodology for calculating the advisory electric rates (AER), the recommended rate for reimbursing employees' EV charging costs for business journeys in company-owned vehicles. 

Previously, this figure was based on annual data from the Department for Business, Energy & Industrial Strategy (BEIS). Now, HMRC will calculate it every financial quarter, using data from BEIS and the Office for National Statistics, as well as car electrical consumption rates from the Department for Transport and annual car sales volumes to businesses.

In March 2023, the AER was increased from 8p per mile to 9p per mile – but in light of recent increases in electricity costs, some remain concerned this doesn’t go far enough in covering the additional costs.

Is investing in EVs still a good idea?

While the tax cost of providing an EV as a company car is gradually increasing, it’s still much cheaper than petrol or diesel – with the added benefit of being better for the environment.

That said, there are a few other factors for your clients to keep in mind. 

There’s the cost of purchasing or leasing an electric car, for one thing, which tends to be higher than petrol or diesel cars. As a result, the list price which forms the basis of taxable benefit-in-kind will be higher.

Then there’s the question of charging, and the extra planning needed to make sure drivers have access to charging points on long journeys. Employers will need to factor in the cost of recharging, and depending on how the energy is supplied, it might count as a taxable benefit. 

If your client is considering purchasing an electric car, it might be wise to do it now rather than later. As the 2030 ban on new sales of petrol and diesel cars and vans looms closer, EVs are set to take up a larger market share – and that makes it unlikely the existing tax advantages will last much longer. 

As the current incentives of first-year allowances and 2% BiK rates are set to end in 2025, your clients only have a couple of years to take advantage. 

Allica Bank’s asset finance makes it easy for SMEs to access the finance they need to invest in the equipment they need to grow. A tax and energy-efficient fleet could take them a step further in that journey. Talk to your Allica Bank relationship manager to find out more.

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