the tax benefits of going electric

does it make sense to buy an electric car privately, or through your limited company?

Should I buy an electric car through my Limited Company?

The technology behind electric cars is getting better every year. Tesla is taking the market by storm and they are starting to look like the only eco-friendly alternative to the traditional car.

For business owners, does it make sense to buy an electric car privately, or through your limited company...

In summary, there’s no one size fits all answer.  To work out the cheapest option you need to take into account:

- the price of the car

- its CO2 emissions (if any)

- the year it was registered,

- the amount of business mileage, and

- your other personal and business tax affairs.

Generally higher rate tax payers will make a substantial saving in the short term, with gains decreasing each year of use.

In this article we will summarise the main tax considerations for buying an electric car through a limited company and then go through a worked example.  

Let's look at the various taxes:

VAT

To reclaim the VAT on any car, it needs to be used exclusively for business.  Remember for HMRC purposes your usual commute between home and office is counted as personal rather than business travel.


If the car is to be used for a mix of personal and business journeys then the VAT treatment will be the same whether you buy it personally, or through the business:  you can’t reclaim any of it.


Corporation tax

If you buy an electric car through the business you can offset part of the cost against your corporation tax bill.  With most cars this deduction will be applied gradually over time, however with electric cars you can claim the full deduction in the year you buy it.  


If you buy the car personally you will have to use cash that has already been subject to corporation tax and income tax.  


If you use your personal car for business journeys then you can charge the company 45p per mile for the first 10,000 miles and then 25p per mile after that.  


Income tax and national insurance

If you buy a car through the business, but intend to also use it for personal use this will create a ‘benefit in kind.’  In summary this will count as though the business has paid you additional income and there will be income tax and national insurance to pay as a result.  You’ll also need to complete an additional filing called a P11D once a year.  


From 6 March 2020, the ‘benefit in kind’ has been 0%! However, this is rising to 1% from 6 March 2021, and again to 2% from 6 March 2022.

The valuation of the benefit in kind depends on the list price of the car and its CO2 emissions.  For example a fully electric car that cost £50,000 would give rise to a benefit in kind of £0 in 2020/21 (with the exact amount changing each year).  You can view the up to date tables here.

Let's try out some numbers...

Example 1:

Buying a £50k + VAT car through business and using 50/50 business and personal.  Higher rate tax payer.


Cost of car: £50,000

VAT (£50k * 20%):  £10,000

Corporation tax deduction (£50k * 19%): -£9,500

Income tax saved: -£24,000

National insurance saved:  -£7,200

Benefit in kind tax (£6,500 * 40%): £2,600

Class 1A national insurance (£6,500 * 13.8%): £897


Net cost after one year: £29,997


Note:  the income tax deduction and national insurance saving above takes into account the tax that you would have to pay if you were to use income acquired via salary to buy the car.  This the best possible case saving and is likely to be lower.

Example 2:  

Buying a £50k + VAT car personally and using 50/50 business and personal

4,000 business miles per year


Cost of car: £50,000

VAT (£50k * 20%):  £10,000

Business mileage deduction (4,000 * 45p): £450


Net cost after one year: £59,550

Other considerations

Vehicle excise duty on electric vehicles is substantially cheaper than on other cars.

There is no capital gains tax on selling cars.

Electric cars are currently exempt from the London Congestion Charge.


Further reading

Deloitte have a detailed site on car taxes at  http://www.cartaxguide.co.uk/#!/Home

This article is intended for information purposes only and should not be relied upon as a substitute to professional advice.  The information is correct as of February 2021.  

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