VAT and Tax Breaks For Electric and Hybrid Cars

Numerous misconceptions surround the application of VAT breaks for businesses considering the purchase of electric and hybrid cars, with some of these myths even perpetuated by car dealerships.

It’s crucial to dispel these misunderstandings and understand the intricacies of tax implications associated with eco-friendly vehicle acquisitions.

Tax breaks

Contrary to popular belief, there are no specialised tax breaks provided by HMRC for electric and hybrid cars.

The pivotal factor in VAT recovery lies in the vehicle’s usage. VAT can only be reclaimed on the purchase of such cars if they are dedicated solely to business use, with no allowance for private utilisation, including commuting between home and work.

If a business opts for leasing, a 50% VAT recovery is possible on hire charges, coupled with full recovery on supplementary services such as maintenance and roadside assistance.

Motoring scale charges

The primary tax advantage, however, emerges from the motoring scale charges.

While both electric and hybrid cars are subject to the same rules as their internal combustion counterparts, the absence of carbon dioxide (CO2) emissions in electric vehicles exempts them from scale charges.

Hybrid cars, benefiting from reduced CO2 emissions, incur a lower scale charge compared to traditional combustion engine vehicles.

Road tax

Moving beyond VAT considerations, the Vehicle Excise Duty (commonly known as road tax or car tax) for hybrid cars, registered post-1 March 2001, is calculated based on CO2 emissions.

Due to their inherently lower tailpipe CO2 emissions, hybrid cars generally fall into lower tax bands, resulting in a tangible reduction of around 20%-25% compared to non-hybrid models.

Tax on company cars

When it comes to company car tax, which is calculated based on a ‘benefit-in-kind’ rate derived from the car’s value and tailpipe CO2 emissions, hybrid cars enjoy a favorable position.

Their improved fuel economy and lower CO2 emissions translate into a lower company car tax compared to non-hybrid equivalents. This can significantly impact the overall cost of providing company cars to employees.

Green technologies

Businesses investing in green technologies can further benefit from an Enhanced Capital Allowance (ECA). Cars with tailpipe CO2 emissions below 95g/km qualify for ECA, allowing companies to set the entire cost of the asset against their taxable profits in the first year following purchase.

This presents a substantial tax advantage and incentivizes the adoption of environmentally friendly vehicles within corporate fleets.

Congestion charges

For those navigating the urban landscape, particularly in London, the Congestion Charge holds relevance.

Introduced in July 2013, the ultra-low emissions discount scheme offers a 100% discount on the London Congestion Charge for vehicles emitting 75g CO2/km or less, meeting Euro 5 emissions standards.

While this provides a notable financial benefit, businesses should be aware of the nominal £10 annual registration fee associated with this scheme.

Summary

In summary, while there are indeed tax breaks associated with the adoption of electric and hybrid cars, it is essential to understand that the recovery of VAT on their purchase is contingent upon their dedicated use for business purposes.

Beyond VAT, the various tax advantages, including reduced scale charges, favorable Vehicle Excise Duty, lower company car tax, and the potential for Enhanced Capital Allowances, underscore the financial benefits of incorporating eco-friendly vehicles into corporate fleets.

How we can help

Navigating the complexities of tax implications for electric and hybrid cars requires a nuanced understanding of regulations and expertise in financial planning.

Williamson & Croft stands as a reliable partner in guiding businesses through the intricacies of tax considerations associated with eco-friendly vehicle acquisitions.

With a team of seasoned professionals well-versed in tax rules and corporate finance, we can offer tailored solutions to optimise VAT recovery, capitalise on motoring scale charge advantages, and leverage other tax incentives available for green technologies.

From expert advice on Enhanced Capital Allowances to strategic insights on minimising company car tax liabilities, we are committed to helping businesses make informed financial decisions that align with their sustainability goals.

To explore how Williamson & Croft can assist your business, we invite you to schedule a free consultation with our experienced team.

Take the next step towards a tax-efficient and environmentally conscious future by reaching out to us today. Your journey to financial optimisation and sustainability could start with a simple message.