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Building a greener economy with taxation

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In recent years the Government has used taxation in a number of ways to try to incentivise businesses to become greener. Both the carrot and stick approaches have been used. Measures like the Climate Change Levy and Landfill Tax discourage environmentally unfriendly behaviour with additional costs, whereas in other areas there are tax benefits available for behaving in a greener manner, such as the enhanced capital allowances available for investment in energy efficient items of plant and machinery.

The taxation of company cars has been a key area, and one which has been subject to big changes in government policy. For years the taxation regime led many companies to provide diesel vehicles to their employees and directors, driven by benefit in kind rates and the lower CO2 emissions of diesel vehicles. In the wake of the “dieselgate” scandal, taxation policy changed and there are now extremely low benefit in kind rates available for fully electric and hybrid vehicles. This leads to opportunities for businesses to provide incentives to employees in a tax efficient manner.

Company Car Benefit in Kind Rates

Let’s look at how the benefit in kind rates work with some real examples, using the rates applicable from April 2021:

ELECTRIC PETROL ELECTRIC
Tesla Model 3 BMW 3 Series Porsche Taycan
Standard Range Plus 320i Sport Saloon Turbo S
List price £40,490 £35,435 £138,830

 

Benefit in kind rate

 

1% 33% 1%
Annual taxable benefit

 

£405 £11,694 £1,388
Estimated tax and NI payable by higher rate taxpayer

 

£170 £4,911 £583
Class 1A NI payable by employer

 

£56 £1,614 £192

 

We can see that the, roughly equivalent, Tesla and BMW models lead to vastly different taxable benefits. The Tesla would cost an average higher rate taxpayer £4,741 a year less in tax and National Insurance. From the employer’s perspective, the initial cost of the Tesla is higher (by £5,055) but there is a saving of £1,558 a year in Class 1A National Insurance which, over a three year period, amounts to a total saving of £4,674.

Even taking the extreme example of the Porsche Taycan, the benefit in kind is still substantially less than the traditional petrol vehicle. There is, of course, a significant cost to the employer in the vehicle price, but perhaps employers will look to shift the balance of remuneration packages to allow for employees to take less of their total remuneration in salary and a higher proportion in the value of their company car.

We also need to consider the other major benefit available to employers when providing low emission vehicles to employees – a 100% first year capital allowance.

Capital allowances

Low emission vehicles, including cars with CO2 emissions of less than 50g/km, qualify for a 100% first year allowance where the vehicle is purchased by the employer, either outright or on hire purchase.

The Tesla and Porsche in the above example would, therefore, be deductible in full against the company’s profits for the year in which the car is provided. The BMW, however, would be allocated to the special rate pool and qualify for an annual deduction of 6% on a reducing balance basis.

The Tesla would, therefore, at a tax rate of 19%, save £7,693 in corporation tax in the year of purchase, whilst the BMW would only yield a tax reduction of £403.

The Porsche would yield a tax saving of £26,378 which would go some way to offset the higher initial cost.

The benefits don’t stop there

If a business chooses to install electric charging points it can also claim a 100% first year allowance for those costs.

Where an employer pays for the cost of charging a company-provided electric vehicle there is no taxable fuel benefit for the driver, as electricity is not classified as a fuel for the car benefit regulations.

Where employees are allowed to charge their own, privately owned, electric vehicles at the workplace, there is also no taxable benefit to them for the provision of that electricity.

The future

There has been much talk of “building back better” following the COVID-19 pandemic. Green taxation policies can be a key driver in that. The uptake in the usage of electronic vehicles could provide an opportunity for economic growth both directly within the car industry and in associated areas, such as the development of a wider network of charging points. Changing attitudes to car usage and ownership that have been accelerated by the uptick in usage of video calling software could lead to increased demand for innovation in car sharing and subscription services bringing further economic and green benefits.

The effect of the Brexit deal agreed in December 2020 cannot be ignored. At present, most electric vehicle manufacturers source battery components from outside the EU (usually China, South Korea or Japan). The Brexit deal gives a six year grace period during which time there will be no tariffs applicable on the import or export of electric vehicles between the UK and EU. After this period, if 45% or more of the car’s value arises from outside the EU, tariffs will apply. UK and European car manufacturers will need to work hard to reorganise supply chains to keep below this level given the high proportion of value represented by the batteries in electric vehicles.

There are, undoubtedly, challenges, but perhaps there is an opportunity to expand a sector of the economy focussed on battery development and manufacture.

If you would like further advice or guidance on this issue, please contact Jamie Wooldridge.

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