Electric vehicle tax considerations for family businesses
Duncan Hainsworth, Assistant Manager, Private Clients
In recent years, as part of the government’s clean energy drive, the running of petrol/diesel business vehicles have been targeted with increasing tax charges, whilst the use of electric vehicles (EV) has been increasingly incentivised.
With ongoing developments in technology and infrastructure in the EV market, combined with surging fuel costs, is now the time to switch?
Let’s consider the tax reliefs available for both the family company and the family partnership.
To demonstrate, take two company cars bought for £80,000 and sold four years later for £20,000, each used in the business 50% of the time:
| Vehicle 1 - EV | Vehicle 2 - >50 g/km | |
| Year 1 |
£10,000 £80,000 x 100% x 50% business x 25% CT |
£600 £80,000 x 6% x 50% business x 25% CT |
| Year 2 | Nil |
£564 £75,200 x 6% x 50% business x 25% CT |
| Year 3 | Nil |
£530 £70,688 x 6% x 50% business x 25% CT |
| Year 4 |
£2,500 tax payable £20,000 x 50% business x 25% CT |
£5,806 £66,447 tax value - £20,000 sale proceeds £46,447 x 50% business x 25% CT |
| Total Relief | £7,500 | £7,500 |
Company
Corporation Tax
In the year of purchase, the total cost of a new EV is deductible against company profits for Corporation Tax (CT) purposes. For a vehicle with emissions over 50 g/km only relief on 6% of the cost is available in year 1.
With the Corporation Tax rate increasing to 25% in 2023, this may seem an attractive relief. However, it should be stressed that this may be more of an acceleration of relief rather than an increase.
Of course, EVs may depreciate at different rates to other vehicles, and Corporation Tax rates may change in the future. However, this highlights that the initial enhanced Corporation Tax relief for EVs will be partially recovered by HMRC if the vehicle is sold.
Income tax/National Insurance Contributions (NICs)
Typically, employees/directors give up their salary in return for the benefit of the company car. The part of the salary given up is not subject to tax and NICs so, in turn, the benefit is subject to tax on the individual and NICs on the company.
In simplest terms, the benefit is calculated by applying a set percentage to the list price of the vehicle. Subject to the range of the EV, the percentage can be as low as 2% in the current tax year (2022/23) and the next. This can be a sharp contrast to the rates for higher emission vehicles.
As an example, in 2022/23 a higher rate tax payer could pay a Benefit-in-Kind (BiK) charge as low as £640 on an £80,000 EV, with £221 NICs payable by the company. A similarly priced vehicle with emissions of 125g/km would attract a £9,600 BiK charge, and a £3,312 NIC liability.
Partnership
Income Tax/National Insurance
The rules for partnerships are very similar to those in the table above. The difference being the relief is passed directly to the members and therefore achieved at the marginal tax rate of tax of the individual rather than the 25% Corporation Tax rate. So, it follows that there is no corresponding BiK rules for partners due to the transparency of the partnership.
The question of whether an EV can be more tax efficient for a partnership and its members ultimately boils down to the marginal rates of tax in the year of purchase and sale. Referring back to the table above, higher rate partners could secure 40% tax relief upfront for the full cost of an EV. If their marginal rate of tax drops to 20% in the year of sale, the tax due back to HMRC on the proceeds would be reduced.
ConclusionFor both the family company and family partnership, the 100% upfront relief available on the purchase of an EV is an attractive incentive. However, there will likely be a partial repayment of the relief at the point that the vehicle is sold. It is therefore the current reduced BiK rates that make an EV the tax efficient choice for company owners. Of course, tax is not the only factor to consider when purchasing an EV. Current range limits and recharging points are still areas of concern for many. Please get in touch with your usual Crowe contact if you would like to discuss the benefits. |
