I run a Limited Company, what tax relief can I claim on an electric car?

After the recent fuel shortages, the question of tax savings when buying an electric car comes up a lot.  We all had to suffer the smugness of those sharing photos of their car being charged while most of us joined the soul-destroying queues at petrol stations and so we are not surprised that so many business owners are weighing up their options.

What tax relief can I claim?

The tax relief largely depends on how you pay for the car.  You can either take a lease (pay monthly instalments and give the car back at the end of the lease) or purchase, either outright or with a Hire Purchase agreement (monthly instalments and own the car at the end of the term).

Tax relief on a leased car

VAT

If you are VAT registered you will be able to reclaim 50% of the VAT in each instalment.  So, if your monthly payment is £400 + £80 VAT you can reclaim £40 for example.  The cost to the business is then £480 – £40 VAT reclaimed = £440 per month.

There will also be VAT in the deposit so the VAT reclaim in the first year of the lease will be more.

Corporation Tax

Your company will receive tax relief on the payments that you make each year (excluding any VAT reclaimed).  So, in the example above, the annual cost to the company would be £440 x 12 = £5,280.  This would be deducted from your profit and you will save tax, in 2021/22 the rate of tax is 19% and so the tax saved would be 19% of £5,280 = £1,003.20.

It’s worth noting that this tax relief applies for the entire length of the lease so you will get tax relief for 2-4 years on average.

Tax relief on a purchased car

VAT

Unfortunately, you can’t reclaim the VAT on the purchase of the car (except in special circumstances which we won’t go into here – they very rarely apply).

Corporation Tax

Your company will receive tax relief on the value of the car in the year that you buy it (or enter into a Hire Purchase agreement).  So, if the cost of the car is £50,000, this will be deducted from your profit and, as above when you lease a car, you will save tax.  Using the 2021/22 tax rate of 19%, the tax saved would be 19% of £50,000 = £9,500.

There would be no further Corporation Tax savings in future years even if the monthly Hire Purchase payments are still being made.

You should also be aware that when you sell the car, you have to repay some of the tax relief.  If you sold the car for £20,000 you would repay 19% of £20,000 = £3,800 as an example.  This means that it is not possible to buy a car, obtain lots of lovely tax relief and sell it a year later.

Will there be any personal tax?

Yes.  Whether you lease the car or buy, there will be a small amount of tax in the form of a benefit in kind.  The benefit in kind is calculated as 2% of the list price in 2022/23 so if your car costs £50,000, the benefit in kind will be £1,000 (£50,000 @ 2%).

The benefit in kind is then added to your personal income and taxed at either 20% (£200) if you are a basic rate tax payer or 40% (£400) for higher rate taxpayers.

There will also be a small amount of class 1A National Insurance to be paid by the business.  It is currently 13.8% of the benefit.  In this example this would be £1,000 @ 13.8% = £138.

What else do I need to consider?

As with every tax there are exceptions to the above rules and you might need to consider other things such as the difference between the tax treatment of cars and vans or how it changes when a car is used by employees instead of the business owner.

Don’t forget that your circumstances and that of your business are unique – it’s always advisable to check with your accountant before you commit.  Tax rates change each year!

For simple and easy to understand advice, come to Adams Accountancy. Give us a call on 01322 250 001 or email info@adams-accountancy.co.uk.