Tax Treatment of Low Emission Vehicles

Low Emission Vehicles Tax Benefits in the UK

The United Kingdom government, including both central government and local government, aims to inspire the citizens of the United Kingdom to focus on the environment and decrease the usage of CO2 emission vehicles, thereby, augmenting the practise to use vehicles with low or zero CO2 emission. To encourage citizens to follow this, the government is providing many tax measures that incentivise such activities. For these tax measures, distinct emissions cut-off dates and thresholds are applicable for capital allowances, employee benefits, leasing costs, and optional remuneration arrangements (OpRA).

Capital Allowances for Low Emission Vehicles

Cars do not meet the requirements of the annual investment allowance, even if a car has low CO2 emissions. It must be noted that the cost of procuring any commercial means of transportation can be claimed under annual investment allowance, hence, it is imperative to make sure whether a motor vehicle meet the requirements of a commercial vehicle or not, for tax purposes. The annual investment allowance cap is £1 million for procurements made during 2019 and 2020, and will return to £200,000 beginning 1 January 2021. Until 1 April 2021 (for income tax the date is 5 April 2021) a low or zero CO2 emission vehicle is eligible for a 100% first year allowance – this is only applicable if the vehicle’s CO2 emissions do not surpass 50g/km; the car must also be purchased new and unused (Capital Allowances Act 2001, s45D). A similar provision, 100% first year allowance, is also applicable for zero emission vans, where the vans are purchased new and not in use prior to 1 April 2021

Benefits-in-kind for Low Emission Vehicles

The proportion of list price of a car provided by a company, which is taxed as a benefit, is computed by the CO2 emissions of the motor vehicle. For 2019/20, low emission cars (maximum emission up to 50g/km) are taxed at a rate: 16% of list price, the rate for diesel cars is 20%. The list price take account of the cost of any additional accessories, however, does not consist of any mark-down negotiated with the dealer

Prior to 6 April 2015, the taxable benefit on electric cars was zero, however, post that electric cars came under the radar of other low emission cars, and the percentage slowly increased from 5% to 16%. Since, electric cars are more expensive as compared to similar-sized diesel or petrol variants of a car, the increase discourages companies to provide electric-only company cars

Hybrids encouraged for Low Emission Vehicles

Beginning 6 April 2020, the policy aims to encourage the provision of hybrid vehicles and electric cars. Cars with CO2 emissions till 50g/km will consider the range/distance a car can travel using only electric power. Tax year 2020/21, can be beneficial for UK citizens who aim to purchase an electric company car, as 100% first year allowance can be claimed by the electric car owners, and for a company car an employee will be taxed at 2% of the motor vehicle list price. Conversely, the United Kingdom government’s strategy concerning electric company cars ahead of 2021 remains ambiguous

Optional remuneration arrangements (OpRA) for Low Emission Vehicles

If an employee has been provided with a car under an Optional remuneration arrangement, then the advantage is valued as the total salary given up, and not as the apposite proportion of the list price of the car. It must be noted that Optional remuneration rules are not applicable if the company car has CO2 emissions below 75g/km. Here, the definition of low emission is different from that used for capital allowances

Tax Benefits on Leased cars

In case of leased cars the amount of deduction, which in general would be allowable, is decreased by 15% if the car’s CO2 emission is high. In this scenario, the threshold for ‘high’ is associated with capital allowances, being in excess of 110g/km for leases beginning on or post 1 April 2018 (6 April 2018 in case of income tax)

Tax Benefits on Electric vans

In 2019/20, the taxable benefit for making use of a normal company van is £3,430 and the electric van benefit is 60% of £3,430 i.e. £2,058. For 2020/21 the tax applicable on electric van will be 80% of the benefit for a normal van, and for 2021/22 the tax will be 90% of the benefit for a normal van. If a van is only used for business purpose, there is no taxable benefit at all

Cost of charging for Low Emission Vehicles

Since, electricity is not categorised as a fuel for car or van, if an employer pays the amount corresponding to the price of charging an electric vehicle provided by a company then there is no taxable fuel advantage for the driver

Free charging at workplace

Beginning 6 April 2018, if an organisation permits an employee to charge their personal electric vehicles at the place of work, then there is no taxable advantage for providing free electricity. For this exclusion to be applicable, the charging amenities must be provided at or close to the place of work – this is similar to the requirement that is applicable for tax-free office parking. In case of multiple sites, an employer is not liable to make provisions for an electric vehicle charging point at each of them. The tax exemption will not be applicable if an employer compensates the amount paid for charging an employee’s own vehicle at a motorway service station or any other place that is away from the workplace.

Charging points for Low Emission Vehicles

If a business or company installs electric vehicle charging points during the period 23-Nov-2016 – 31-Mar-2023, it will be eligible to claim a 100% first year allowance for those costs (s45D, Capital Allowances Act 2001 (CAA 2001)). For any charging point installations post this period, the cost would be eligible for an annual investment allowance.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.