If there is one thing that benefitted from the COVID 19 lockdown it was the environment.
Less cars and other modes of transport made an appreciable impact.
Before lockdown the government had introduced incentives particularly relating to electric cars.
Some of these incentives differed in different parts of the UK, particularly in Scotland where more incentives are available and detailed below.
Electric Cars – 100% Allowances
The government in its drive for a greener environment provided what was known as enhanced capital allowances for electric cars. Cars whereby the CO2 emission is 50g/km or less.
These cars are entitled to 100% writing down allowance in the first year as opposed to 18% each year for non-compliant vehicles.
This made them potentially attractive to limited companies as opposed to individuals who practiced as sole practitioners who were still caught by a restriction on business use.
Although the legislation was introduced in 2018 and the 100% allowances available until 5 April 2021. It was the benefit in kind associated with such vehicles that in some instances did not make them attractive to limited companies until recently.
Benefit In Kind
Where an employer, such as a limited company provides an individual with an asset to use personally such as a car, a personal tax liability can arise based upon the value of the benefit in kind.
The benefit in kind is calculated in numerous ways as determined by HMRC.
For high CO2 emitting cars the amount of the benefit in kind treated as income on an individuals tax return can be as high as 37% of manufacturers retail price ('MRP'). This means for a car with an MRP of £100,000 then £37,000 would be included as income on the individuals tax return with say 40% or 45% tax due each year the car is available.
A key point to know, is the benefit in kind is based on the MRP, not what was paid for the car.
For these high emitting car’s it can take a very long time for the company to benefit from tax relief as the Capital Allowances can be restricted to 18% on a reducing balance basis meaning only a proportion of the cost to buy the car is deducted from company profits each year. For the individual, a high emitting car owned by a limited company could be very tax inefficient.
Prior to April 2020 the benefit in kind on pure electric cars was 16% whereas the 100% tax relief in the company meant effectively 19% (corporation tax) was saved. However, in second and third years it became less attractive as the benefit in kind in these years was still 16% with no additional tax relief.
From April 2020 the benefit in kind percentage dropped to 0% and for 2021/22 and 2022/23 rises to 1% and 2% respectively. This makes electric cars very tax efficient.
This means that for the three years of ownership there is very little income tax to pay personally on the car and the company should benefit from tax relief on the full cost of the car in the year of purchase.
One practical thing to remember is that when the car is sold or traded in, the company will pay tax on the amount the car was sold/traded in for at the prevailing rate of corporation tax, currently 19%.
An alternative to buying is leasing.
Many clients will be considering a car lease instead as this leaves the risk of ownership with the leasing company. With technology moving at a pace and the fact a large proportion of the population in the UK living in apartments or terraced housing, many will not have the ability to charge their car at home which ultimately means the second hand market for electric cars is restricted which could impact on the resale value of the car when you come to sell it.
With a lease the tax relief for a limited company works in a different way but the personal tax position is no different. For the company, tax relief is available on the monthly rental payments which means the tax relief is more evenly spread over the lease period instead of lots of tax relief up front then a tax liability when it is sold. The latter tax liability can sometimes catch some people out so some clients prefer the much more simple method of leasing.
VAT registered businesses can also claim up to 50% of the lease rental VAT and 100% of the maintenance VAT back from HMRC.
Normally, if fuel is provided by the employer there is a further benefit in kind. For electric cars there is no additional benefit in kind. This includes recharging at work.
Grants & Loans (Scotland)
Across the UK grants of up to £3,000 are available towards the purchase of a new electric car or one that was an ex demonstrator, less than 12 months old and less than 6,000 miles.
In addition, there are certain grants of £350 towards home charging.
In Scotland an interest free loan of up to £35,000 is available to individuals purchasing an electric car costing less than £50,000 and £10,000 for electric motorcycle or scooter.
These loans can be repaid over 6 years.
Details of the loans can be found here.
In addition to the above businesses in Scotland are entitled to £120,000 of loans covering not only cars similar to above but also video and teleconferencing facilities.
For further details and advice on cars and any allowable expense in your practice whether as a sole practitioner, partnership or company then please do not hesitate to contact one of the partners or associates.