March 12th 2015

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

By Robert J Johnstone, Associate, JRW Chartered Accountants

Robert J Johnstone, Associate, JRW Chartered Accountants
Robert J Johnstone, Associate, JRW Chartered Accountants

There has been a huge surge in demand for ultra-low emission vehicles in the UK, with sales of electric and hybrid cars increasing four fold in 2014. And despite declining oil prices in the second half of 2014, sales of these vehicles continue to rise with car manufacturers in a race to produce the cleanest, fastest, best performing and ultimately best- selling alternative energy models. Early February even saw driverless car trials beginning in London, Milton Keynes and Coventry 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.

In the US, car giant GM has just unveiled its long awaited electric car, the Chevy Bolt battery electric car which features an amazing 200 mile range per charge. And even Apple are reported to be working on an electric car that could be released by 2020. As China seeks to reduce its pollution and conserve resources, buyers of electric cars and other types of new energy vehicles will be completely exempt from purchase tax until the end of 2017.

But closer to home what does this mean for motorists here in the UK, electric and hybrid cars are obviously good for the environment but just how good are they for our pocket?

Going electric – the tax breaks
The government does of course encourage the use of electric and hybrid cars through the use of tax breaks. 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. 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.

Excise duty
For cars registered since 1 March 2001, vehicle excise duty (or road tax) is based on CO2 emissions – so it’s generally lower for a 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 CO2 emissions. As hybrid cars have lower emissions due to their improved fuel economy, company car tax is generally lower than it would be for a non-hybrid equivalent car.

Capital allowances
For some green technologies, you are able to claim enhanced capital allowances (ECA) intended to allow you to set the whole cost of the asset (used for business-related activities) against taxable profits in the first year following purchase. New cars with CO2 emissions of less than 95g/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 charges
The ultra-low emissions discount scheme was introduced in July 2013. Under it, all vehicles that emit less than or equal to 75g CO2 /km and meet Euro 5 emissions standards qualify for a 100% discount on the London Congestion Charge (subject to a £10 annual registration fee).
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.

JRW Chartered accountants in Edinburgh, Galashiels, Hawick, Langholm and Peebles.