COMPLIANCE
The VAT treatment of electric cars
Peter Gladdish, managing director at PSTAX , considers the value-added tax (VAT) treatment of electric cars used in a business, a current area of debate
W ith a continuing push towards all-electric cars, one would trust that the tax rules would be carefully thought out and consistently applied to provide certainty and clarity for businesses. Unfortunately, it seems there is still some way to go. Recovery of VAT on the purchase of an electric car There is a popular misconception that a business can always enjoy full recovery of VAT on the purchase of an electric car on the premise that the ‘green’ credentials confer that right automatically. In reality, the VAT treatment of an electric car is no different to that of a motor car powered by any other means. Assuming a business ordinarily recovers all its VAT costs, the VAT can be reclaimed on purchasing a motor car that is to be used exclusively for business purposes. However, if there is any private use of the vehicle, no VAT is recoverable. Private use will range from using a company car as if it were the driver’s own vehicle, to using a pool car for a personal journey. For VAT, private use includes any travel between a place of work and home, with some limited exceptions. These rules apply whether the car is purchased outright or using hire purchase or lease purchase. Where a car is leased or hired for use in a business and made available for personal use, VAT recovery is restricted to 50%. The recovery VAT on the cost of repair
or maintenance of the car is not restricted. If the VAT recovery is restricted to 50%, an employer doesn’t account for VAT on payments for private use from an employee, usually made by salary deduction. This is because the 50% restriction has already made the VAT adjustment for private use. The VAT treatment of an electric car is no different to that of a motor car powered by any other means The VAT on commercial vehicles can be recovered in full. Generally, Her Majesty’s Revenue and Customs (HMRC) views any incidental private use of most commercial vehicles as de minimis. This would include regular travel between an employee’s home and place of work. However, should the vehicle be used more extensively for private purposes, the business can either: ● restrict the recovery of VAT costs to reflect the private use; or ● recover the VAT costs in full, but account for VAT each period to reflect the private use – known as the ‘Lennartz Principle’.
home, the electricity used will form part of the domestic supply to the householder and be subject to VAT at the lower rate of 5%. For public charging points, strong representations have been made to HMRC that the 5% rate should apply as well. The supply of power received by the driver at public charging points will invariably be of a de minimis quantity below which a supply is always deemed domestic and chargeable at 5%. However, it is HMRC’s policy that the supply of power at a public charging point is subject to VAT at the standard rate of 20%, backed by the argument that there is not an ongoing supply to one person in which the consumption, and therefore the liability, can be calculated. Where employees charge an electric car at their residences for business and private use, the employer has a choice. It can either restrict the recovery of VAT on the cost of the electricity attributable to business use. Or, it can recover VAT in full on the cost of electricity and account for VAT on the value of the private element as if it had received it as income. In either case, the employee would have to keep a record of business and private mileage. Mileage allowances This is where things become difficult and, I would argue, unnecessarily so. The HMRC advisory rate for a company-provided electric car is 5p per mile. It should be noted that this only relates to wholly electric vehicles. Hybrid vehicles are
VAT on recharging costs Where a vehicle is recharged at a driver’s
| Professional in Payroll, Pensions and Reward | February 2022 | Issue 77 14
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