The tax impact of greener motoring

As motorists, our growing demand for reduced costs and greater efficiency coupled with increased choice and performance, has resulted in a massive increase of plug in and hybrid car sales.

There has been a huge surge in demand for ultra-low emission vehicles in the UK, with sales of electric and hybrid cars increasing.  BEVS (Pure Battery powered Electric Vehicles) have risen by 158% in the year to July 2019 and by the end of the year at least 25 different electric cars will be on sale.  There have also been driverless car trials and it is thought that if driverless cars do become an everyday reality, benefits would include improved road safety, reduced congestion, less emissions, as well as saving motorists up to 6 working weeks a year in driving time.

Going electric – the tax breaks

The government does of course encourage the use of electric and hybrid cars through the use of tax breaks. Regrettably, the value of grants has declined and plug-in hybrids have not received any financial support since 2018.

One area where the government could make a significant contribution to more environmentally friendly cars is through VAT, particularly when the UK is able to set its own rates post-Brexit. Reducing the rate of VAT on ULEVs from 20% to 5% would help but in the real world it is highly unlikely that the Treasury will agree to such a reduction.  But what concessions are actually allowed and what are some of the common misconceptions?

Common misconceptions

There are some commonly held misconceptions about the VAT breaks for businesses buying electric and hybrid cars. There have been numerous cases of car dealers telling customers that businesses can recover the VAT on the purchase of an electric car.

The reality

The first point is that HMRC has no special VAT breaks for electric cars and hybrids. The VAT can only be recovered on the purchase of the car if there’s no private use at all, and that includes home-to-work journeys. So you can only reclaim the VAT on the purchase of the car if it’s for 100% business use only.  An example of this would be a taxi.  If your business leases the car, then you can recover 50% of the VAT on the hire charges and all the VAT on any additional charges such as maintenance or roadside assistance.

Scale charges

The main tax break is on the motoring scale charge. The rules are exactly the same for electric and hybrid cars as for those powered by fossil fuels, however the savings come from the fact that the scale charge is based on CO2 emissions and as electric cars produce no CO2 they don’t pay the scale charge, although the VAT you can reclaim on electricity used to charge the cars will be minimal. On the plus side hybrids will pay a scale charge, but because of the reduced CO2 emissions the charge will be lower than for conventional cars.

HMRC gives no special VAT breaks to electric or hybrid cars but due to their low emissions there are savings on the scale charge excise duty and other direct taxes.

The cleaner the car, the bigger the savings.

For more information on this subject please contact Jonathan Main