Tax reliefs on electric cars

First year tax reliefs on electric cars currently provide an incentive for businesses to replace existing vehicles with electric versions.

For around the past 20 years, first year allowances have been available for low emission cars purchased for business use. The current rules enable tax relief to be claimed for 100% of the vehicle’s cost in the year of purchase.

However, this is coming to an end. Only qualifying low emission or electrically propelled car purchases made on or before the 31^st March 2025 will qualify for FYAs.

Expenditure incurred on the provision of electric vehicle charging points also qualify for First Year allowances at the moment. But this is due to come to an end on the 5^th of April 2023 for income tax purposes and the 31^st of March 2023 for corporation tax purposes.

Businesses of all sizes can claim First Year Allowances on a car provided that:

the car is ‘unused and not second-hand’;
it is registered on or after the 17^th of April 2002;
it is an electric car, or a car with a car producing zero CO2 emissions, and;
the expenditure is incurred on or before 31 March 2025.

Supply chain issues

An increase in demand for electric cars, coupled with supply chain issues in the motor industry, mean long delays in delivery. It can take many months and in some instances around a full year.

If payment is not required until delivery, this could delay the date that the relief becomes available. For capital allowance purposes, expenditure is treated as incurred once an obligation to pay becomes unconditional. With the above dates in mind, timing is important.

First Year Allowances are meant to encourage businesses to invest in ‘green’ business assets, such as electric cars. The incentive for doing so can be tax relief for 100% of the cost in the year of purchase.

If a car purchase does not qualify for FYAs, capital allowances are instead available at a maximum rate of 18% per year on a reducing balance basis. Depending on the value of the vehicle, this could take around 20 years for tax relief to be obtained in full for the cost of the car.

Example

A sole trader, or a partner in a business, that purchases an electric car for £50,000 before 31 March 2025 can:

Get tax relief of up to £24,125 in year one,
meaning the net cost of the car could be £25,875.

A purchase of the same vehicle on or after the 1^st of April 2025 would:

Attract tax relief of just over £4,342 in year one

This is a difference of over £19,780.

There may be an extension to First year tax reliefs on electric cars in the future but there are no guarantees. The Government may have other priorities right now.

As things stand time is running out for businesses looking to maximise tax relief for ‘green’ investments in electric cars and charging points.

Something to be aware of if this is on your agenda.