Leasing an electric car through a limited company

We are being increasingly asked by business owners whether it’s tax efficient for them to get an electric car through their own limited company, so we have written an article to explain the key factors to consider when making this decision.

Historically, company cars have been quite tax inefficient due to the benefit in kind taxation system which can often mean high personal tax bills – however HMRC have reduced the benefit in kind rates on electric cars substantially, at least for the time being, which has made electric company cars quite an attractive option.

 

Leasing an electric car through a limited company

 

Benefit in kind on company cars

First, let’s discuss what a benefit in kind is and what this means for company cars.

A benefit in kind is when a company provides an employee or director with a personal benefit – this could be something like private medical cover, gym membership or a company car.

Every year a company has to declare to HMRC what benefits have been provided to their employees and directors and this results in a national insurance cost to the company and a personal income tax charge on the employees.

The employer will give a form called a P11d to their employees which details the benefits they have been provided with during the tax year.

For example, if an employee who is a higher rate tax payer was provided with £1,000 of private medical cover by their employer, the employee would pay £400 personal tax on this (£1,000 x 40%) and the employer would pay £138 of class 1A national insurance (£1,000 x 13.8%) – these are based on the rates for the 21-22 tax year.

However, company car benefits in kind are calculated in a more complicated way and are driven by two factors:

  • The list price of the vehicle
  • The benefit in kind rate %

The list price of the vehicle is usually the manufacturers list price of the car when new plus the cost of any accessories on the vehicle (something to be careful of here is that even if you get a second hand company car you’re going to be taxed on it based on its price when new).

The benefit in kind rate for non-electric cars will depend on the emissions levels of the vehicle – the higher the emissions the higher the benefit in kind rate.

For example, in the 21-22 tax year if you have a petrol company car with emissions of 132g/km this would mean a benefit in kind rate of 30% – if the list price of the vehicle was £35,000 this would equal a total benefit in kind of £10,500.

If you are a higher rate tax payer the personal tax on this for 21-22 would be £4,200 (£10,500 x 40%). If you are also provided with fuel by your employer there are further taxable benefits which we won’t get into here.

When it comes to electric cars the tax works the same way, however the key thing is that HMRC have massively reduced the benefit in kind rates and in the 21-22 tax year they are only 1% – as things stand these will increase to 2% in 22-23 and the current intention is for them to stay at that rate for the tax years 23-24 and 24-25, but this could be subject to change.

For example, if you have an electric car with a list price of £35,000, for the 21-22 tax year the benefit in kind charge will only be £350. This is a very low rate, but a word of warning, we would expect the government to gradually increase these tax rates over the years so it’s something to keep an eye on.

A few other points:

  • Hybrid cars are a bit more complicated as the tax rate will depend on the emissions and also the zero emission mileage range they have, we have not covered that here
  • Benefit in kind tax for company vans works differently to cars, again that is not something we cover in this article
  • The benefit in kind system means you will pay tax on your company car every tax year that you have it, it’s not just a one-off cost

The rest of this article will focus on electric cars as they are likely to be the most attractive option for a company car for the coming years.

 

Electric car through company – lease or purchase?

If you have decided that you want to get an electric company car the next decision will be whether to buy the vehicle outright or whether to lease it.

Buying an electric car outright is actually quite complicated from a tax and accounting perspective.

For the accounting treatment, the vehicle will be capitalised as a fixed asset and you will depreciate it over the useful life of the vehicle – this means the cost of the vehicle gets initially booked to the balance sheet and then gets released over the years to the profit and loss account as depreciation.

However, the tax treatment will be different than this – currently for the 21-22 tax year new electric cars qualify for something called ‘first year capital allowances’ which means the cost of the vehicle is allowable in full as a tax deductible cost in the year purchased. This might sound very attractive but bear in mind if you sell the vehicle you will have a taxable profit in the year it is sold.

This complexity and difference between the tax and accounting treatments can make it very difficult to understand what the financial position is and can make your balance sheet and profit and loss account more confusing, so many people prefer instead to lease an electric car as this is much simpler.

With regards to leases there are two different types when it comes to accounting:

  • Operating lease – where you are basically renting the vehicle and give it back to the lease company at the end of the lease – this means the ownership of the vehicle remains with the lease company
  • Finance lease – where you are borrowing money to purchase the vehicle and the ownership of the vehicle is yours (or rather your businesses) from day one

Most people who lease an electric car will do so through an operating lease (often called contract hire) so we are focussing on that – a finance lease (sometimes called hire purchase) is more complicated and takes you back to the different tax and accounting treatment when you buy a vehicle which we discussed earlier.

The benefit of an operating lease is that you don’t need to worry about fixed assets, depreciation and capital allowance – the monthly lease cost is simply treated as an operating cost of your business in just the same way as costs like rent, software etc. so your business will save corporation tax based on the total lease costs in the period.

For example, if your vehicle lease costs are £5,000 for the 21-22 year then the corporation tax savings would be £950 (19% x £5,000).

 

VAT on electric cars

When it comes to VAT, having an operating lease for your electric car is much better because you are allowed to reclaim 50% of the VAT charged on the lease costs, as long as there is some business use of the vehicle.

If the car is not available for any private use i.e. it is 100% used only for business, you could technically reclaim all of the VAT but this would be very difficult to prove to HMRC, so the advice is to reclaim only half of the VAT charged on the lease cost.

However, if you were to buy the car outright (or purchase through a finance lease) then you are not allowed to reclaim any of the VAT. There are exceptions, but only for taxi drivers, some pool cars, driving schools, car rental businesses and garages.

 

Summary

The low benefit in kind tax rates currently make it attractive to get an electric car through your limited company – and if you are going to do this, it is probably much simpler through a business operating lease where you are just renting the vehicle and give it back at the end of the lease.

Please be aware that the tax rules around electric cars are likely to change over the years so it’s important to keep up to date with the latest guidance.

Finally, just because something is tax efficient doesn’t necessarily mean it’s the right thing to do – you should make sure your company can easily afford the costs and it won’t impact on the cashflow & profit of your business.

 

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