There are some commonly held misconceptions about the VAT breaks for businesses buying electric and hybrid cars, even by car dealers trying to sell a new car.
Input VAT Claim rules
It is not uncommon for car dealers to tell buyers that their businesses can recover the VAT on the purchase of an electric car. This is not the case; the block on input recovery on internal combustion cars applies equally to electric and hybrid cars.
The first point is that HMRC has no special tax breaks for electric cars and hybrids. The VAT recovery position is that VAT can only be recovered on the purchase of the car if there is no private use at all, and that includes home-to-work journeys. So, a business can only reclaim the VAT on the purchase of the car if it is for 100% business use only. If a business leases the car, it 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 charges. The rules are exactly the same for electric and hybrid cars as for cars powered by fossil fuels; however, the savings come from the fact that the scale charges are based on CO2 emissions and as electric cars produce no CO2, they do not pay the scale charge, although the VAT they 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 lower CO2 emissions, the charge will be lower than for conventional cars.
Excise duty
For cars registered since 1 March 2001, Vehicle Excise Duty (often known as road tax or car tax) is based on CO2 emissions.
Due to their lower tailpipe CO2 emissions, car tax for hybrid cars is generally lower than it would be for a non-hybrid model. With CO2 levels being reduced by around 20%-25%, hybrid cars are placed three to four tax bands lower than would otherwise be the case.
Company car tax
When a company car is made available for private use, a ‘benefit-in-kind’ rate is calculated based on the car’s value and its tailpipe CO2 emissions.
As hybrid cars have lower tailpipe CO2 due to their improved fuel economy, company car tax for hybrid cars is generally lower than it would be for a non-hybrid equivalent car. With CO2 levels being reduced by around 20%-25%, hybrid cars are placed many tax bands lower than would otherwise be the case.
Capital allowances
For some green technologies, businesses can claim an enhanced capital allowance (ECA) intended to allow a company or organisation to set the whole cost of the asset (used for business-related activities) against its taxable profits in the first year following purchase.
New cars with tailpipe C02 emissions of less than 50g/km are eligible for an ECA. While any technology can qualify, several hybrid models have CO2 emissions under the relevant threshold. Business-owned hybrids, therefore, can lead to significant savings in corporation tax within the year of purchase.
Congestion charge
The ultra-low emissions discount scheme was introduced in July 2013.
Under the scheme, all vehicles that emit less than or equal to 75g CO2/km and meet Euro 5 emissions standards qualify for 100% discount on the London congestion charge (subject to a £10 annual registration fee)
Conclusion
There are some tax breaks for the use of electric and hybrid cars, but there is a block on the recovery of VAT on their purchase unless there is 100% business use.
