Is it Time to Purchase an Electric Car for Your Business?
Climate change has certainly jumped to the top of the national and international conversation over the last year, and you may have noticed recent news reports promising government tax breaks on electric cars These breaks are coupled with the announcement that the sale of new petrol, diesel and even hybrid cars will be banned from 2035. Both measures are designed to get electric vehicles on the road and help meet our emissions targets.
What is Company Car Tax?
Company car tax in its current form has been with us since 2002, it was originally introduced to steer businesses and their employees towards low emission vehicles. Company car tax only applies to vehicles that the business makes available to an employee for private use. It’s a big earner for the government, generating approximately £2.5billion for the Treasury every year.
Company Car BiK
100% electric cars are exempt from paying Vehicle Excise Duty (otherwise known as road tax), rewarding drivers and businesses that opt for the most environmentally friendly cars and vans.
However, if you have one as a company you will have to pay Benefit in Kind tax (BiK). BiK tax applies to all benefits that are classed as a perk and is calculated based on the car’s CO2 emissions and list price, as well as the employee’s tax bracket. The actual formula used to calculate BiK tax is (list price) x (BiK band) x (income-tax bracket) = BiK tax. Simply put, the more expensive the car, the higher the salary and the more CO2 a car emits, the higher its BiK rate is. Currently, electric cars have a BiK rate of 16%.
Changes from April 2020
But cruise control forward to April 2020 when BiK rates are changing. New lower rates are being introduced on zero emission, 100% battery electric vehicles (BEVs), meaning that they will pay no company car tax in 2020-21, just 1% in 2021-22 and then just 2% in 2022-23.
In fact, any car that emits less than 75g/km CO2 will pay less road tax. Keep in mind that hybrids have been added to the list of vehicles that there will be a ban on selling from 2035, along with diesel and petrol cars.
This means that BEVs are the outright winners in terms of tax savings, as they have zero harmful emissions. So, this could provide many business owners with the perfect moment to switch to electric vehicles, both for themselves and their employees.
This link shows the new bands and rates for tax year 2020 to 2021. https://www.fleetnews.co.uk/fleet-faq/what-are-the-current-bik-bands-/3/
And here’s a handy tool to calculate the benefit in kind value of any car: https://www.parkers.co.uk/company-car-tax-calculator/
Save Corporation Tax
In addition to punitive rates of benefit-in-kind, capital allowances for company cars have become increasingly restrictive over the years.
But buy a new car for your business that has very low emissions, defined as less than 50 g/km you can claim 100% of the cost in the first year. A car costing £30,000 would be worth a reduction in tax of £5,700. Install a car charging point at your place of work and you can write that off too.
Of course, the cost of running the car, including maintenance, repairs and insurance, is also a deductible expense for the company.
What about VAT?
Business owners are frequently disappointed to discover that they can’t claim VAT on company cars. The exception, which applies to all company cars, is that you can claim 50% of the VAT on lease payments.
And of course you can claim VAT on the running costs.
Personal Tax Benefits
0% benefit-in-kind means there’s no personal tax to pay if your company makes an electric car available to you.
But that’s not all. The cost of buying and running a car comes to thousands of pounds a year. Saving this much means that you can take less income from the business and so pay less personal tax.
For example, if the cost of running a car is £5,000 per year, it will eat up £7,500 of your income, assuming you pay tax @ 32.5%. By letting the company pay for the car, you can reduce your dividends by £7,500 saving you almost £2,500 in tax.
In addition to all these tax benefits, the Mayor of London has introduced a scrappage scheme to phase out older vans and minibuses. Those eligible include:
- Small businesses
- Sole traders
In fact there are many scrappage schemes out there. This £23m fund is aimed at helping businesses who use vans that don’t meet the Ultra Low Emissions Zone (ULEZ) in London. The grants include £7,000 for scrapping (up to three) older and more polluting vehicles and £9,500 towards scrappage and the cost of running of an electric vehicle.
There are eligibility criteria based on the size of your business and turnover. In some cases the business must prove its registered address in a London Borough or the City of London. Read the full details of eligibility here.
Thinking of taking advantage of the BiK tax or the ULEZ scrappage scheme? If you would like some advice, just give us a call on 020 8819 8762. Or email us at [email protected] and we’ll do our best to help.