Significant corporate and personal tax breaks are available where a company buys a full electric vehicle and provides this as a benefit in kind to a director or employee.
The Ford Mustang Mach E, Kia E Niro, VW iD3 and 4 and many other new cars are 100% electric vehicles, so if your company buys it as a company car, the full cost of buying the car will be 100% allowable for corporation tax in the year of purchase, 2021. This is a huge corporate tax planning opportunity, which effectively reduces the cost of the car by 19%, based on current CT rates.
If the company then provides this car to an employee or director as a benefit in kind, there is a further huge bonus, as currently there is a very low benefit in kind on EVs.
The devil is of course in the detail as the BIK is actually 2%, reduced by a 2% discount in 2020/21 and a 1% discount in 2021/22. So from April 21 there will be a 1% BIK and on a £50k EV this equates to £500 per annum in 2020/21, rising to the full 2%, £1,000, in 2022/23. The BIKs would be taxable in the usual way through the employee’s tax code. Employer’s Class 1A NIC would also applied on the BIK value at 13.8% – but these numbers are still very low.
A personal car financed by PCP
If you consider the scenario of a company with profits of £50k before tax, looking after tax to pay this out as a dividend to a director shareholder. The £50k would be reduced by 19% corporation tax, leaving £41k and if it then paid this as a dividend, assuming personal higher rate dividend tax at 32.5%, it would ultimately leave the director shareholder personally with circa £27k, net of tax.
They might then use this £27k to personally buy a car, not necessarily an EV, which on a personal PCP deal with a £5k deposit and £600 per month over 3 years, would cost £27k – in my “car maths” example, the same as the net of tax dividend. At the end of the 3 years the car should be worth about 50% of its new cost, which should mirror the final PCP balloon payment, which should also be about £27k.
So starting with £50k pre-tax in the company, a net of tax dividend would fund the car for 3 years and let you walk away from a PCP deal at the end, but you and the company combined will have suffered more than 51% of tax on the £50k pre tax profit.
The EV company car route – a “half price” EV?
This is when a full EV really starts to make sense from a tax perspective.
If in the same scenario as above, the company buys the EV outright and provides the car to the director shareholder as a benefit in kind, the £50k cost of the EV is wholly tax deductible in year 1 and the resulting BIK tax is minimal. At the end of the 3 years, the car should still be worth about £27k, and the full cost borne by the company is effectively covered by the corporation tax saved and the higher rate dividend tax avoided by not paying a dividend.
At worst you are effectively getting the car half price and given that it would still be worth just over 50% of its new cost in 3 years, you could even perceive the car cost the director shareholder and the company nothing, given the tax saved and avoided and its expected residual value in 3 years…
It is worth noting that after 3 years when the company sells the car, there will be a balancing charge on the capital allowances – so clawing back currently 19% of the sale proceeds – but, applying “car maths”, this is something to plan for in 3 years time, at which point you would probably just roll on into a replacement car.
To qualify for this EV company car route at its optimum:
- The car must be a 0g/km full EV
- It must be acquired in the name of your limited company
- And this must be done in a way that allows the company to claim the 100% capital allowance – so not a lease or contract hire agreement
The finance options appear to be:
- Buy the car outright for cash – eg £50k
- Buy it on Hire Purchase through the company
- There are now “Business PCP” arrangements, with a balloon equalling the residual value of the car – this would be ideal from a cashflow perspective
- Or have a 3rd party bank or finance loan to fund the car
This will not work if the car is on a business lease or contract hire
Typically these lease / hire arrangements include payments plus VAT, so are easily identified. A lease or contract hire arrangement still has the BIK advantages to you and theoretically the rental payments should reflect the 100% tax deduction received by the finance company but this is difficult to see in reality in my view.
The tax breaks on EV company cars are currently huge and I cannot see them lasting for more than another year at the current levels, but given the 2030 deadline for petrol and diesel new car sales, some incentives have to remain.
The scenario is this article involves a degree of “car maths” when it comes to the economics of car buying. The tax rates illustrated are correct as of April 2021. If you are considering this EV car buying route, please get in touch to ensure the model does work in your particular circumstances.
Martin Gibbs is Dafferns Managing Partner and a serial car buyer, who is enjoying the internal combustion engine while he can… To find out more about company cars, EVs, car finance and “car maths” in general, please contact Martin.