Until recently, company cars have been unpopular because of the high benefit in kind (BIK) charges associated with them, and it has been simpler and more tax efficient for employees and directors to claim business mileage. However, the Government is committed to ending the sale of new petrol and diesel cars in the UK by 2030, which has led to the introduction of tax incentives to encourage the use of environmentally friendly cars.
An ultra-low emission vehicle (ULEV) is one that emits less than 50g/km CO2.
The new rules that apply to ULEVs mean that it can now be tax efficient to opt for the company to buy or lease such a car on behalf of an employee or director.
This article looks at the tax benefits and costs of company ULEVs.
What capital allowances are available?
The level of capital allowance available depends on the CO2 emissions of the car.
From April 2021 a first-year capital allowance of 100% of the cost can be claimed on all new and unused cars with zero emissions. This means the company can set the full cost against its taxable profits in the year of purchase, creating a saving of 19% corporation tax. Prior to April 2021 the 100% allowance could be claimed on all vehicles with CO2 emissions of 50g/km or less.
For new and second-hand cars with emissions between 1g/km and 50g/km, you can claim an annual writing-down allowance of 18% of the cost.
For new and second-hand cars with emissions above 50g/km, the annual writing-down allowance is 6% of the cost.
A few points to note on capital allowances:
- The allowance is based on the actual expenditure rather than the list price.
- With writing down allowances, it can take years to provide full relief for the cost.
- If you decide to buy the car from the company, there will likely be a clawback of some of the capital allowances already claimed.
- If claiming the full amount in the year of purchase creates a loss which cannot be utilised, it is possible to opt to claim less than the full 100% and claim the balance in subsequent years using writing down allowances.
- The 100% first-year allowance is only available in the year of purchase and on brand-new cars.
What benefit in kind (BIK) will be incurred?
A BIK arises when a company buys a car on behalf of an employee or director. This benefit is incurred every year the car is made available because it is assumed there is some element of personal use as well as business use. The BIK must be entered on your personal tax return and you will pay tax on this at the relevant rate on your income for the year (at either 20%, 40% or 45%). The company will also incur 13.8% employer national insurance on the BIK amount.
The rate of the BIK depends on the CO2 emissions and the list price (rather than the amount you end up paying). It can be up to a hefty 37% of the list price.
However, new ULEV cars registered from 6 April 2020 onwards attract a very low BIK as follows:
2021/22 – 1% of the list price pa
2022/23 – 2% of the list price pa
Cars with CO2 emissions of between 1 to 50g/km will incur a BIK of between 1% to 14% depending on the electric range of the car. The further the car can travel on electric power, the lower the BIK.
In the 2020 budget, it was confirmed that the 2022/23 rates would remain static for a further 2 years until 2025. No changes were announced in the 2021 budget.
You can use this HMRC calculator to check the taxation of your car HMRC company car and fuel benefit calculator
The current and proposed BIK rates for electric cars registered from April 2020 onwards are:
Vehicle CO2 emissions
|1-50 g/km and electric range >130 miles||1%||2%||2%|
|1-50 g/km and electric range 70-129 miles||4%||5%||5%|
|1-50 g/km and electric range 40-69 miles||7%||8%||8%|
|1-50 g/km and electric range 30-39 miles||11%||12%||12%|
|1-50 g/km and electric range <30 miles||13%||14%||14%|
What is the fuel benefit in kind?
If the company pays for fuel, you will incur an additional fuel BIK unless you reimburse the company for any fuel relating to private use.
For 2021/22 the BIK on fuel is £24,600 multiplied by the BIK multiplier applicable to the car. Therefore, for example, if the BIK is 8% then the fuel BIK will be £24,600 x 8% = £1,968. The £1,968 would be included on your tax return and taxed according to your tax bracket (at 20%, 40% or 45%). If you are taxed at, say, 40% then the cost of this benefit is £787, plus the company will pay 13.8% Employers NI of £272. Therefore, depending on the BIK arising, it might be better to either not be reimbursed for any petrol, or at least to reimburse the company for all private mileage. HMRC provide fuel advisory rates that state the minimum amount that would need to be reimbursed HMRC fuel advisory rates
For fully electric cars, you can claim 4p per mile for every business mile travelled, to cover the cost of electricity, with no tax consequences. For hybrid cars, the fuel advisory rates apply.
Can I reclaim the VAT incurred on the purchase?
VAT can only be claimed if the car is used exclusively for business. This means no personal trips at all, which is highly unlikely. There is no option to apportion the VAT reclaim between business use and personal and therefore VAT cannot generally be claimed.
Are the lease payments deductible for corporation tax?
Provided the car has emissions of 50g/km or below, the full monthly payments are deductible expenses that can be set against profits, which leads to a corporation tax saving at 19%.
For cars with emissions above 50g/km, 85% of the monthly payments can be claimed.
For contracts entered into prior to April 2021, the restriction only applied to cars with emissions above 110g/km.
What benefit in kind (BIK) will be incurred?
The same BIK arises every year as with car purchases – see above.
Can I reclaim VAT on the lease payments?
If the vehicle is also used for personal use, as well as for business (almost always the case), then the company can reclaim 50% of the VAT incurred on the monthly lease costs.
There has been a definite shift towards encouraging the purchase of zero-emission cars rather than hybrid cars, and this trend looks likely to continue until 2030. Therefore, whilst it is impossible to predict whether the very low BIK rates that currently apply to ULEVs will increase, it looks likely that the Government will continue to keep these rates low for electric cars.
Whether you opt for the company to purchase the vehicle, or lease it, depends on a number of factors, including how long you think you will need the car and how confident you are that you will continue trading through the company whilst any lease agreement is in place (there can be hefty penalties if you need to exit early). Both options currently provide favourable tax deductions for your company. If you decide the company will buy the car, you should ensure the purchase invoice or lease agreement is in the company name.
Most car dealerships will provide financial comparisons for the car you are interested in buying, and it is worth obtaining these before making your decision. Note also that new cars with CO₂ emissions of less than 50g/km and a zero-emission range of at least 70 miles may be eligible for a government grant. Grants for zero-emission cars