Last reviewed 15 October 2018

Many businesses nowadays supply employees with company cars and with so many options on vehicle types, employers may consider using zero or low emission vehicles. With tax advantages for certain types of vehicles, John Davison outlines the tax advantages of ultra-low emission vehicles compared to other vehicles.

There are several advantages to providing employees with electric, or ultra-low emission vehicles, both for the employer and the employee. The Government uses tax to modify behaviour and can change its view on what it wants to promote. For many years, the Government encouraged the use of diesel vehicles which led to a significant increase in numbers of diesel vehicles. Nowadays, diesel-powered vehicles are no longer being encouraged through tax incentives and owners of diesel motors are now being taxed more than petrol vehicles. Currently, the Government is providing tax incentives for ultra-low emission vehicles, however, this could be in the future.

Fuel taxes

Fuel duty is charged on most road vehicle fuels which increases the cost of fuel for road vehicles. No duty is charged on electricity or hydrogen used in a fuel-cell engine. The rates of duty for other fuels in 2018/19 are:

Fuel

Rates of duty

Petrol, diesel, bioethanol

57.95p per litre

liquefied petroleum gas (LPG)

31.61p per kg

Natural gas

24.70p per kg

The running cost of an electric or ultra-low emissions vehicle is not, therefore, burdened with fuel duty costs, reducing the cost of the fuel for these vehicles.

It should also be noted that road fuels such as petrol, diesel, LPG and gas are subject to VAT at 20%. Where this VAT is reclaimed by a business and there is private use of the vehicle, a road fuel scale charge is applied. The amount of the charge depends on the vehicle’s carbon dioxide (CO2) emissions. A table showing the charges that are applied is at www.gov.uk. As electricity is not a road fuel, no road fuel scale charge applies to the private use of a business’s electric vehicle by an employee. Electricity is subject to VAT at 20% when it is supplied to a business (this VAT can be reclaimed by the business). If a car is charged at an employee’s home, then no VAT can usually be claimed and the VAT is charged at 5%.

A benefit in kind (BIK) also arises on the employee where private fuel is provided which is removed if the employee pays for private mileage. As electricity is not a road fuel, there is no BIK for private mileage. Also, there is no BIK where the employee recharges its vehicle at the employer’s premises.

Vehicle excise duty

Vehicle excise duty (VED) is charged on all vehicles according to the CO2 emissions of the vehicle. VED is measured in grams per kilometre and the amount varies depending on the date when the vehicle was registered. The VED regime changed from 1 April 2017 — prior to this date, the amount charged was a single annual VED payment which increased according to the level of CO2 emissions of the vehicle. For cars registered before 1 April 2017, a £10 discount applied to the annual VED rate for “alternate fuel vehicles” — cars not solely powered by petrol or diesel (including hybrids).

For vehicles registered on or after 1 April 2017, a new regime applied. This applied a rate payable in the first year (the first year rate) that varied according to the CO2 emissions of the vehicle. In subsequent years, a standard rate of £140 is applied.

For vehicles registered from 1 April 2018, the first year rate differs depending on whether the vehicle is diesel powered or uses another fuel. Cars costing over £40,000 pay an additional £310 supplement for the first five years in which the standard rate is payable.

For vehicles registered before 1 April 2017, no VED is applied where the emissions were below 100g/km. After this date, only zero-emission vehicles are exempt from paying VED.

The current rates for vehicles registered from 1 April 2018 are:

CO2 emissions (g/km)

First year rate

(£)

First year rate for diesel vehicles

(£)

Standard rate

(£)*

0

0

0

0

1–50

10

25

140

51–75

25

105

140

76–90

105

125

140

91–100

125

145

140

101–110

145

165

140

111–130

165

205

140

131–150

205

515

140

151–170

515

830

140

171–190

830

1,240

140

191–225

1,240

1,760

140

226–255

1,760

2,070

140

Over 256

2,070

2,070

140

* Cars costing over £40,000 pay a £310 supplement for the first five years the standard rate is paid.

Grants

A plug-in car grant and plug-in van grant are available to reduce the costs of qualifying ultra-low emission vehicles. This is a payment against the full purchase price of the vehicle cost (excluding the cost of optional extras, delivery charges and registration fees). Further information is at www.gov.uk (see Capital Allowances (CAs) section for the impact the grants have on CAs for vans).

Benefit in kind — company cars

Where a car is provided by a business to an employee, the private use of the vehicle is treated as a BIK. This is subject to income tax (on the employee) and the employer must pay Class 1A National Insurance Contributions (NICs). The BIK is calculated by applying a percentage to the price of the car (list price plus any accessories; for an electric car this includes the batteries, even if leased separately). The percentage is applied by using a sliding scale according to CO2 emissions. For low-emission vehicles, the scale is adjusted according to the number of miles that can be driven with zero emissions. The rates applicable over the next few years are shown below:

CO2 emissions (g/km)

Zero-emission mileage

2018/19

%

2019/20

%

2020/21

%

0

13

16

2

1–50

>130

13

16

2

1–50

70–129

13

16

5

1–50

40–69

13

16

8

1–50

30–39

13

16

12

1–50

<30

13

16

14

51–54

16

19

15

55–59

16

19

16

60–64

16

19

17

65–69

16

19

18

70–74

16

19

18

75

16

19

20

Above 75g of CO2/km, the percentage increases by 1% for each increase of 5g to a maximum of 37%. There is also a 4% supplement for diesel cars added to these percentages. Diesel cars that meet the RDE2 standard (Euro 6d standard) are exempt from the diesel supplement.

Example

Compare the cost for a 20% taxpayer of two £30,000 cars, where the first is a zero-emission vehicle and the second is a petrol car with emissions of 105g/km. The 105g/km vehicle has an extra 6% charge over the rate for a 75g/km percentage.

Emissions 105g/km

2018/19

2019/20

2020/21

Total over three years

Percentage BIK

20%

25%

26%

Car benefit charge

£6,600

£7,500

£7,800

Tax at 20%

£1,320

£1,500

£1,560

£4,380

Zero emissions

2018/19

2019/20

2020/21

Total over three years

Percentage BIK

13%

16%

2%

Car benefit charge

£3,900

£4,800

£600

Tax at 20%

£780

£960

£120

£1,860

There are also commensurate reductions in employer’s Class 1A NICs.

Salary sacrifices are used to reduce the cost of the BIK charge, but this ended following the Autumn Statement 2016, other than for ultra-low emission vehicles. Low-emission vehicles still benefit from a reduced tax charge where there is a salary sacrifice.

The HM Revenue & Customs (HMRC) provides a calculator to determine the applicable rate available at www.gov.uk.

Benefit in kind — vans

Vans are subject to a flat rate charge of £3350 in 2018/19, where the van is used for private use. Zero-emission vans only pay 40% of this charge, but this will increase annually until it reaches the same charge as the main rate in April 2022. If the employer pays for the fuel used in the van when it is subject to this flat rate charge, there is a further charge of £633 for the fuel benefit. These flat rate amounts are subject to income tax and employer NICs. Electricity is not a road fuel so it is not subject to the van fuel benefit charge.

Advisory fuel rates and approved mileage allowance payments

Advisory fuel rates (AFR) are amounts that can be used by the employee to reimburse the employer for private mileage. Optionally, actual fuel costs can be used instead of the AFR. A hybrid vehicle will use the AFR petrol or AFR diesel rates as appropriate. AFRs do not apply to electric cars.

Where an employee pays for road fuel, the employer can reimburse the employee for the fuel cost using the Approved Mileage Allowance Payments (AMAPs). These reimbursements are not subject to tax or national insurance. Amounts in excess of the AMAP are to be reported to HMRC and are taxed and subject to NICs. Hybrids and electric cars are treated in the same way as petrol and diesel cars for AMAPs. The current rates can be found at www.gov.uk.

Where employees are not reimbursed for fuel costs for business mileage in the employee’s car, the employee is entitled to receive a mileage allowance relief equivalent to the AMAP.

Capital allowances

The claiming of CAs allows a business to reduce its tax costs for assets that are purchased for use in the business.

CAs allowed changed on 1 April 2018.

Prior to this date, CAs for cars were:

  • cars with emissions of 75g/km or less qualify for a 100% first year allowance

  • vehicles with emissions between 76–130g/km qualify for an 18% allowance

  • those above 130g/km can only claim an 8% allowance.

From 1 April 2018 until April 2021 CAs allowed are:

  • cars with emissions of 50g/km or less qualify for a 100% first year allowance

  • vehicles with emissions between 51–110g/km qualify for an 18% allowance

  • those above 110g/km can only claim an 8% allowance.

A 100% first-year allowance is also permitted for electric vehicle charge points installed before 2019. Vans only benefit from the enhanced CA for zero-emission vehicles if the plug-in van grant is not claimed.

Conclusion

It is clear that there are substantial tax advantages to using ultra-low emission or zero-emission vehicles. Some of the benefits are short lived (such as enhanced CAs), while others are being introduced in later tax years (such as 2% BIK charge that is being introduced in 2020/21). It is always recommended that your accountant’s advice should be sought to determine the actual benefits to your business. Also, while there are tax advantages, it is necessary to ensure that these vehicles are appropriate to your business and your staff needs.