How EVs are taxed: what you need to know if you’re thinking of switching

With fuel costs soaring and mounting pressure to become more sustainable, switching to EVs is looking increasingly appealing to a growing number of businesses. Especially with substantial electric vehicle tax benefits.

While the upfront cost remains high compared to petrol or diesel vehicles, charging is cheaper than filling up. Yes, even at the current cost of electricity. EVs also save money on electric vehicle road tax and congestion charges. And, as a business, there are compelling electric vehicle tax incentives, too.

In this post, we’ll walk you through the financial implications of switching to EVs if you’re a business. What you can claim, how much you could save, and the financial impact on employees.

Buying an EV: what can your business claim?

EV deductions are generally more generous than they are for petrol and diesel cars. Especially if the vehicle you buy is fully electric or a low-emission hybrid.

HMRC distinguishes between three types of EVs:

New and unused electric vehicles – New cars that produce zero CO2 emissions qualify for a 100% first-year capital allowance. So, if you bought a new electric car worth £35,000 in May 2022, you can deduct the full £35,000 from your profits in the 2022/23 tax year.

Until March 2025, the 100% first-year allowance also applies to new electric vans with zero CO2 emissions. And if you buy a new electric van before March 2023, you’re eligible for a super-deduction of 130%. So if you spend £90,000, you can claim £117,000.

Second-hand electric vehicles – Here, you can claim a writing down allowance at the main rate. This is currently set at 18% per year. So, if you bought a second-hand electric car for £15,000, you’d claim £2,700 the first year, £2,214 the second year (18% of £12,300 — £15,000 less the £2,700 you already claimed), and so on. Keep claiming until you claim the full amount.

Second-hand electric vans qualify for the annual investment allowance, which enables you to deduct the cost of plant and machinery up to £1 million per year.

The £1 million limit is cumulative. So if you’ve invested in several pieces of equipment and the van’s purchase price tips you over £1 million, you’ll have to claim writing down allowances on the remainder.

The writing down allowance is 18% or 6%, depending on whether the van emits  less or more than 50 grams of CO2 per kilometre.

Hybrids – Up to 2021, hybrids qualified for a 100% first-year deduction if their CO2 emissions were 50g per kilometre or less. Since April 2021, this no longer applies. Instead, you can claim a writing down allowance of 18% per year, as you would with a second-hand electric car.

For hybrids that emit more than 50 grams of CO2 per kilometre, the writing down allowance is 6%.

Aside from claiming a capital allowance or writing down allowance, you may also be able to claim VAT on the purchase price. The catch is that you’ll need to prove there’s no private use.

In practice, it’s hard to persuade HMRC that there’s no private use, so you probably won’t be able to claim VAT in most cases.

Electric vehicle tax: Tax deductions on leased EVs

If you lease your EV, you can deduct the monthly payments from your business profits. But how much you can deduct depends on the vehicle’s emissions.

Where your EV emits less than 50 grams of CO2 per kilometre — this covers electric vehicles and most of the latest hybrid models — you can deduct the full payment.

If your EV emits more than 50 grams of CO2 per kilometre, you can deduct 85% of the payment. So if your lease costs £500 a month, you’d deduct £425 and pay tax on the remaining £75.

VAT on leases is also slightly different to VAT on purchases.

While you can only claim 100% of the VAT if you can prove you use the EV exclusively for business, you can still claim 50% of it if there’s private use.

The other financial benefits of EVs

Alongside generous electric vehicle tax deductions, they are cheaper to run, too.

According to RAC, an electric car is more fuel-efficient than a petrol car of similar horsepower. Under comparable conditions, the electric car would use 9p of electricity per mile. While the petrol car would use 19p of fuel per mile.

As things stand, there is no road tax on electric vehicles (this will change in 2025), which means you stand to save an average of £154 per car per year.

They’re also exempt from paying the £15 a day congestion charge and the £12.50 a day ultra low emission zone charge.

The one area where EVs are at a disadvantage compared to petrol and diesel vehicles is car insurance.

Electric cars and hybrids are typically 12% more expensive to insure, mainly because they cost more, there’s less data on their safety, and repairs may be more expensive.

Of course, these costs will likely go down as EVs become more commonplace. According to Compare the Market, this is already happening, with the average EV insurance premium costing £100 a year less in 2021 than it did in 2020.

The financial implications of electric company cars for employees

Employees who have access to a company car need to pay benefit-in-kind tax even if the car is electric.

The good news is that the benefit-in-kind is worked out on CO2 emissions. Meaning EV drivers pay a fraction of what petrol and diesel car drivers pay.

Since 2022, the benefit-in-kind rate for fully electric vehicles is 2%. So if an EV is worth £45,000, the employee pays income tax on £900. For comparison, the average petrol or diesel car emits 138 grams of CO2 per kilometre, which means the benefit-in-kind is 32% of the car’s value.

Between 2025 and 2028, benefit-in-kind rates will increase by 1% every year. But the rates for EVs will still be significantly cheaper than the rates for petrol and diesel vehicles.

The benefit-in-kind rate for hybrids is worked out on their emissions and electric range. That is, the distance they can drive using their battery only.

Hybrids that emit less than 50 grams of CO2 per kilometre. And have an electric range of 130 miles or over have the same benefit-in-kind rate as fully electric cars — 2%.

This goes up to 5% for hybrids with an electric range of 70 to 129 miles, and 8% if the range is 40 to 69 miles. Higher than the rate for fully electric vehicles, but still significantly cheaper than petrol or diesel.

Reimbursing employees’ out-of-pocket EV costs

There’s one EV issue that can prove tricky: how do you reimburse the cost of fuel? Especially if staff charge their car at home?

Unlike petrol or diesel, it’s hard to separate the electricity used to charge the car from that used to power the rest of the home. Add the fact that you also need to separate private and business journeys, and you’ve got a real head-scratcher on your hands.

As an employer, applying the HMRC-approved advisory fuel rate is the simplest way around this, but it has three significant drawbacks:

1. Your staff need to understand the rules around what constitutes business and private mileage.Some journeys will easily slot into one or the other category, but there are grey areas. Case in point, HMRC doesn’t consider commuting to be business mileage, but your staff may not see it that way.Similarly, what happens when an employee drives to a business meeting, but stops to run a personal errand?
2. Staff need to log their miles on an ongoing basis and submit expense claims.There are apps you can use for mileage tracking, but things can still go wrong. Staff might forget to log a journey, for instance. Or, at the other end of the spectrum, they might pad out their claims.
3. Advisory fuel rates haven’t kept up with the rising cost of electricity.The current rate is 8p per mile. But the real cost of charging can be much higher, especially if the car has a larger battery or is less fuel-efficient.According to PodPoint, for instance, the cost of charging a Nissan Leaf at home works out at 8.12p per mile, while the cost of charging a Hyundai Tucson works out at 12.79p per mile.

Reimbursing actual costs is fairer, but more complicated.

The employee needs to supply details of their electricity tariff. You’ll need to work out a kilowatt hour per mile reimbursement rate.

More to the point, reimbursing electricity is a benefit-in-kind unless you can prove business use. And, as with VAT, the burden of proving business use is on you, the employer.

One potential way around these issues is to give staff a prepaid card. This lets them pay for charging on the go. And consider investing in office charging points. This removes the need for reimbursement. And avoids the issue of benefits-in-kind (HMRC doesn’t tax charging at work).

But installing chargers is a huge investment, even when you factor in government help.

The Workplace Charging Scheme reimburses the cost of installing electric chargers at a rate of up to £350 per charger. But commercial electric car chargers typically cost around £1,000 to £1,500 (plus VAT), so the bulk of the cost would come out of the company’s coffers.

EVs are the future, but there are costs to switching

In a November 2022 survey of UK SMEs, 81% of respondents said they want to switch to EVs, with 40% planning to do so in the next two years.

The government is also planning to outlaw sales of new diesel and petrol cars by 2030. So, even for those who aren’t making the switch just yet, it’s a matter of when, not if.

This is undoubtedly positive.

For one, there’s a strong moral argument that businesses should be doing their bit for the environment. And switching to EVs is a significant step in the right direction.

The cheaper running costs will also free up resources you can invest in other projects that help move the business forward.

That said, the high upfront investment required, and the challenges of employee reimbursement mean the switch requires careful planning.

Chances are that, as the number of EVs on our roads increases, costs will go down and regulations will catch up.

In the meantime, argues Soldo’s Accounts Payable Manager Jitesh Patel, “you need to work out what’s cost-effective, especially in this economic climate. Or what looked like a sound investment at first glance might end up causing more issues than it solves.”

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