Electric car taxation for employees and businesses

This article was first published in September 2018.

Recent years have seen a remarkable increase in the popularity of electric cars.  As at December 2017 more than 132,000 ‘plug-in’ cars (see below) had been registered in the UK, up from 3,500 in 2013.

There are broadly three types of car currently available in the UK which have some form of electric propulsion:

  • ‘Pure-electric’ cars – ‘plug-in’ cars with electric propulsion systems only and no petrol or diesel engine.
  • Hybrid cars –  cars which combine a conventional petrol / diesel engine with an electric propulsion system.  These can be sub-divided into two types:
    • ‘Plug-in’ hybrids that can be recharged by plugging into an external source of electricity.
    • ‘Conventional’ hybrids that cannot be recharged by plugging into an external electricity source - instead the electric battery is recharged by the engine or through regenerative braking.

This article refers to all of the above collectively as electric cars.

To further encourage the take up of low and zero emissions vehicles (including electric cars) a range of special tax measures have been introduced.  This article focuses on two specific areas:

  • the employment tax implications of electric cars;
  • the capital allowances available to businesses. 

It does not consider Vehicle Excise Duty, electric vans or the ‘plug-in grants’ which can reduce the cost of electric vehicles.

Employment taxes

Whether a taxable benefit arises in connection with an electric car and how this is calculated depends on whether it is a company car or is personally owned by the employee.

Company cars

If an employer provides an electric car to their employee a taxable benefit in kind will arise.  The value of this is calculated in the same way as for other company cars1, with the following differences for Pure-electric cars:

  • The lower appropriate percentages for zero-emissions vehicles will apply.
  • The list price must include the cost of the battery, even if this is leased separately. HMRC’s position is that as the car cannot move without a battery it is integral to the car.

The changes to the taxation of employee benefits from 6 April 2017 which largely removed the income tax and employer NIC advantages of optional remuneration arrangements such as salary sacrifice (see here) do not apply to ultra-low emissions vehicles.  These are defined as vehicles which emit 75g/km CO2 or less, which will include all Pure-electric cars and some Plug-in and Conventional hybrids. Employers may therefore still find it attractive to provide such ultra-low emission electric cars under salary sacrifice arrangements.

Tax law does not treat electricity as a fuel.  As a result, for Pure-electric cars:

  • The fuel benefit charge in s149 ITEPA 2003 does not apply to any electricity supplied by an employer - no benefit in kind arises if an employer pays to charge a Pure-electric company car (e.g. the car is charged at work), regardless of the level of private mileage.
  • Up until 1 September 2018, Advisory Fuel Rates (AFRs)2 could not be used to reimburse employees for the cost of electricity paid for personally but used for business travel.

HMRC have however announced that, from 1 September 2018, a new AFR of 4 pence per mile will apply for fully electric company cars. 

The new rate means that HMRC will now accept that payments to employees of up to 4 pence per mile for business travel in a fully electric company car will not result in a taxable benefit in kind.  The situation for hybrid company cars has not changed, and remains as set out below.

Employers can choose to use a different rate if, for example, their cars are more efficient, or they can show that the cost of business travel is higher. However, if they pay more than the AFR and cannot demonstrate a higher electricity cost per mile, any excess will be a taxable benefit in kind.

The lack of AFRs for Pure-electric company cars up to 1 September 2018 made the situation for reimbursing employees for business mileage more complicated.  Prior to the introduction of the AFR, where an employee charged a Pure-electric company car:

  • If their employer reimbursed them for the cost of the electricity, the tax treatment depended on the use of the car:
    • Business use only – the s289A ITEPA 2003 exemption for paid or reimbursed expenses would exempt the amount received.
    • Personal or mixed use - the reimbursement was taxable as earnings, with the employee entitled to a deduction for the cost of business miles travelled.
  • If their employer did not reimburse them, they are entitled to a deduction under s337/s338 ITEPA 2003 for the actual electricity cost of business miles travelled.

This raised the practical difficulty of identifying the cost of the electricity used during business miles travelled.  This may have been more straightforward where a commercial charging point was used, but could be difficult to establish where a company car was charged at home.  This practical difficulty has been resolved by the introduction of an AFR rate for Pure-electric cars from 1 September 2018.

Whilst excluding electricity from the definition of fuel did previously cause administrative problems regarding the reimbursement of business mileage, there are some benefits.  In particular, s149(4) ITEPA 2003 extends the exclusion from the car fuel charge to any ‘facility or means for supplying electrical energy’.  This means that an employer can, for example, pay for the following without a taxable benefit arising:

  • A vehicle charging point to be installed at the employee’s home.
  • A charge card to allow individuals access to commercial or local authority charging points.

It should be noted that the above points only apply to Pure-electric cars.

By contrast, Plug-in and Conventional hybrids are subject to:

  • normal fuel benefit rules and
  • the normal application of diesel / petrol AFRs - both in relation to an employer’s reimbursement for business travel where the cost of fuel was incurred personally and in relation to an employee’s repayment to an employer for private travel where the cost of fuel was borne by the employer.

Employee’s personal car

If an employee uses their own electric car for business purposes Approved Mileage Allowance Payments (AMAPs) apply in the same way as for petrol or diesel cars:

  • Any reimbursement by the employer for business mileage is tax and NIC free provided it is no higher than the AMAP rates3
  • Reimbursements in excess of the AMAP rates are taxable and must be reported to HMRC.
  • If the employer reimburses at a rate lower than the AMAP rates, the employee can claim Mileage Allowance Relief (MAR).

An employee may receive a taxable benefit in connection with their personal electric car if their employer:

  • Pays for a vehicle charging point to be installed at the employee’s home.
  • Provides a charge card to allow access to commercial or local authority vehicle charging points.
  • Pays to lease a battery for the employee’s car.
  • Up to 5 April 2018 only, allows them to charge it at work.

In each case, the taxable benefit will be calculated in the usual way and based on the cost to the employer.

It was announced at the Autumn Budget 2017 that, from 6 April 2018, there would be no benefit in kind charge on electricity that employers provide to charge employees’ personally owned electric vehicles.  Draft legislation for this exemption was published in July 2018, which can be found together with a policy paper and explanatory note here

Key features are:

  • The exemption applies to recharging of personally owned all-electric or plug in hybrid cars (including any in which the employee is a passenger);
  • The employer has to provide the charging facilities at or near the workplace; and
  • The charging facilities have to be made available generally to all the employer’s employees.

Importantly the exemption does not cover the reimbursement of costs incurred by an employee in charging the car elsewhere such as at home or a motorway service station.  This remains a taxable benefit, subject to the application of the AMAP rates noted above for business mileage.

The scope of the exemption set out in this draft legislation is broader than was previously indicated by draft guidance published in April 2018.  In particular:

  • There is no longer a requirement for electricity to be provided through a dedicated charging point, meaning that plugging into a normal mains socket at the workplace should qualify.
  • The charging facilities do not have to be provided at premises under the control of the employer, merely at a place at or near the workplace.

Capital allowances

Turning to the business tax treatment of electric cars, there are a number of changes to the usual rules on capital allowances for cars.

Pure-electric cars and some hybrids will usually qualify for the Enhanced Capital Allowances (ECAs) available for low (50g/km or less in 2018-19 and 75g/km or less in 2017-18) and zero emissions vehicles.  These ECAs provide for a 100% first year allowance in the year of purchase.  The Government has announced that it will extend 100% ECAs on low / zero emissions cars to April 2021 (see here for details of this announcement) .

Expenditure on the acquisition of new and unused electric vehicle charging points on or after 23 November 2016 also qualifies for 100% first year allowances.  This relief will expire on 31 March 2019 for corporation tax, and 5 April 2019 for income tax.

It should be noted that, as with petrol or diesel cars, if self-employed taxpayers use the simplified expenses flat rates per mile (see here)  to calculate their deductible vehicle expenses, they cannot also claim capital allowances or actual running costs.

  1. See https://www.gov.uk/expenses-and-benefits-company-cars for more information on the taxation of company cars.
  2. See https://www.gov.uk/government/publications/advisory-fuel-rates for more information on AFRs together with current and historical AFR rates
  3. See https://www.gov.uk/government/publications/rates-and-allowances-travel-mileage-and-fuel-allowances/travel-mileage-and-fuel-rates-and-allowances