QUESTION: I run a limited company business based in Newry and my key salesman’s company car is up for renewal. I’d like to buy a car which minimises environmental impact and I have decided to go for an electric car. His current car’s Co2 rating is 146g, which leads to a big car benefit charge as he is a higher rate tax payer. What are the tax benefits on an electric car?
ANSWER: Many business owners, especially those with company vehicles, are discovering the tax benefits of electric cars.
It is interesting to consider the tax differences on a petrol car v a fully electric car. Someone who took delivery of a new petrol-fuelled BMW 3-series company car (146g/km of Co2) last April is paying a benefit in kind (BIK) tax of 32 per cent, rising to 34 per cent by 2022/23.
A similarly priced, top-of-the-range Nissan Leaf E attracts a 1 per cent BIK and 2 per cent the year after. Do the numbers and you will see that the BMW costs over £13,000 more in tax over three years.
Car tax - officially termed Vehicle Excise Duty (VED) - is based on a car's official tail-pipe Co2 emissions for a first year rate. After the first year, a standard rate applies to all cars, with three core exceptions.
A premium rate is charged for years 2-6 for models costing more than £40,000 when new, whilst alternatively fuelled vehicles - including pure-electric, plug-in hybrid, and hybrid cars - qualify for a £10 Alternative Fuel Discount. Finally, pure-EVs - those with zero-tailpipe emissions - alone qualify for zero VED, including an exemption from the premium rate.
The amount of company car tax payable depends on the official value of the car (called the P11D value), the Benefit-in-Kind (BIK) rate and the recipient's tax code.
Company car tax is closer aligned to a car's tailpipe emissions than VED, and rates are calculated depending on which Co2 band the car sits in. The government has looked to encourage adoption of pure-electric and the most efficient plug-in hybrids by dramatically reducing BIK rates for these models.
Financial Year 2021/22 sees pure-electric models rated at 1 per cent for BIK, and these rates only climb to 2 per cent for FY 22/23 and 23/24. As such, company car drivers can save thousands of pounds a year simply by switching from a diesel model to an EV.
Capital allowances allow businesses to deduct the cost of an eligible expense from its annual tax bill. As with car tax and company car tax, the rate at which a company can 'write down' the value of company vehicles is based on its Co2 emissions.
From April 1 2021 for companies and April 6 2021 for sole traders and partnerships, the capital allowances available on cars will be amended to the following:
• New cars with no emissions (fully electric) – 100 per cent first year allowance
• New cars with emissions 1-50g/km – 18 per cent annual allowance
• Cars exceeding 50g/km – 6 per cent annual allowance.
It should be noted that only new cars qualify for the enhanced capital allowances. Second hand cars are not eligible.
For the 2022/23 financial year, beginning in April 2022, the BiK rate will rise to just 2 per cent – and stay there for the following three financial years (up to April 2024) so there are still huge savings to be made compared to running a petrol or diesel-engined car, which can incur BiK rates up to 37 per cent based on their emissions.
Introduced in 2002, company-car tax applies to cars bought by employers for their employees' private use. It was brought in to encourage both businesses and workers to choose low-emission vehicles, primarily by linking tax payments to Co2 emissions.
There are around a million company cars on UK roads, generating almost £2.5 billion in revenue for the Treasury every year. Not only is going electric good for the environment, it can also be good for the financial health of your company and the personal tax position of your salesman.
:: Feargal McCormack (f.mccormack@pkffpm.com) is managing director of PKF-FPM Accountants (www.pkffpm.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
