Decarbonising transport is a critical component of our journey to Net Zero and it will happen at pace over the next decade. But this transition does not just depend upon consumers. Around six million vehicles on the roads today are part of a vehicle fleet, operated by organisations of all sizes across the public and private sectors. Commercial fleets (cars and vans) will be key to driving EV adoption rates at scale and speed.
For businesses with EV car fleets or whose employees drive EV cars, many are beginning to encounter tax challenges - such as how they calculate the VAT element of business mileage claims or how the business claims back VAT, when HMRC’s policy is that no VAT is recoverable on home-charging because the electricity is supplied to the employee, not the business. Plug-in hybrid cars with a mixture of traditional fuel and electric charging add an additional level of complexity.
The Autumn Statement served to illustrate the subtle changes taking place in the initial stages of the EV evolution. It featured a number of tax benefits and incentives, whilst also highlighting that EVs are firmly on the Government’s radar and very much in the frame as sources of future tax revenue.
Outcomes from the Autumn Statement
Indirect tax
From April 2025, Vehicle Excise Duty (VED) for zero emission vehicles will be introduced, meaning electric cars, vans and motorcycles will pay VED in the same way as petrol and diesel vehicles, which signals an end to the honeymoon period EVs have enjoyed.
Employment taxes
Underpinning the success of EV take up for cars is the benefit in kind (BIK) impact on employees. Clarity around what this means now and in the future is critical, not only for employees themselves, but also for fleet operators and businesses looking to decarbonise their fleets.
The Autumn Statement has provided clarity on the BIK rate until the end of the 2027/28 tax year, giving more confidence in the long term lease position for employers and employees. It was announced that the current 2% BIK rate will continue until April 2025. From 6 April 2025 onwards this will increase by 1% per year, so it is important to note that the impact of this is a slight increase in tax burden for employees and will also result in increased employer Class 1A National Insurance via P11D(b).
There was also an announcement that the mileage rate for reimbursement for EVs is increasing from 1 December 2022 from 5p per mile to 8p per mile, reflecting the significant cost increase in domestic energy costs.
Capital allowances
For corporation tax purposes, the 100% First Year Allowance (FYA) available to businesses installing electric vehicle charging points is to be extended for a further 2 years to 31 March 2025 (5 April 2025 for income tax purposes). This is the second time the relief has been extended since its introduction in November 2016.
While the extension is shorter in duration than previous announcements (potentially indicating that it may not be extended significantly beyond 2025), it continues to incentivise businesses to invest in vehicle charging infrastructure in the short term.
The allowance generates a significant acceleration of tax relief, compared to the alternative of claiming relief through plant and machinery allowances over a number of years. It remains one of the few ESG focussed capital allowances currently available to taxpayers. The benefit of this relief for businesses subject to corporation tax, increases further from 1 April 2023 onwards, when the headline corporation tax rate increases from 19% to 25%.
VAT implications for EVs
Although there were no announcements in the Autumn Statement relating to the VAT position on EVs, there are a number of live issues being considered by HMRC, namely:
- HMRC’s consultation on business’ ability to claim VAT on employees’ EV charging expenses commenced in January 2022, Revenue and Customs Brief 1 (2022): reviewing how to claim VAT when charging electric vehicles for business purposes, and continues to be under consideration. HMRC and HM Treasury have received a number of representations from businesses about the limited options for reclaiming VAT on these costs and the related administrative burden. HMRC plans to publish guidance to confirm its policy once the review is completed, but no timeline for publication has been given.
- There are also ongoing discussions between industry and HMRC on the Revenue and Customs Brief 7 (2021): VAT liability of charging of electric vehicles, published 25 May 2021, particularly in respect of the differential in VAT rates between home charging and public charging of vehicles; 5% and 20% respectively. This debate has highlighted challenges to the legal basis of this position and the neutrality/fairness associated with the difference in VAT rates, particularly in the context of those that do not have access to home charging.
The above “short term” issues and measures are presumably being considered by the Government in the wider context of the future tax revenue model, where the proportion of EVs to traditional fuel road vehicles increases.
Regardless of how the above consultations and discussions progress, businesses should think about their systems and processes, to ensure that information and documents to support VAT recovery on EV charging and other associated costs (such as the leasing of vehicles, fuel cards, employer site and home charging units) can be collated.
These recent tax changes, coupled with the rising focus on the net zero agenda with the UK Government committing to end the sale of new petrol and diesel cars by 2030, have served to push the challenges associated with electrifying fleets higher up the business agenda.
Businesses need to act now to ensure they are best placed to navigate the increasingly complex EV regulatory environment, and maximise the available benefits.
Roadmap to electrifying your fleet
Given the complexity of the rapidly evolving EV market and as road transport decarbonisation grows, businesses will need support and certainty to navigate this change.
Develop a business case for change
Review your current scheme arrangements and providers.
Explore the strategy for the wider transport decisions and how these align with your broader corporate, ESG and sustainability targets.
Complete feasibility review
Analyse your current fleet and scenarios, cost and environmental impact modelling.
Explore areas of consideration with stakeholders.
Policy reviews.
Evaluate and design
Agree design objectives.
Review potential structures and their pros and cons.
Design a high level blueprint and share with stakeholders.
Finalise the design.
Structure and deliver
Deliver the plan across the business, considering processes and controls.
Carry out a tender process to look at outsourcing options and make final recommendations.
Implementation
Manage contractual negotiations and legal aspects.
Implement go live and employee communications.
How we can help
From an environmental and political perspective, the motivation for fleet operators to electrify is increasing. The tax changes announced in the Autumn Statement provide more clarity on the tax aspects of models and the direction of travel from HMRC. The Government is acknowledging the growth in EV fleets, however, there are also a number of areas to be clarified. Alongside this, the Government has its eye on future tax revenue collection, with the VED announcement being the first big indicator of intention.
Our EV specialists can help you with all aspects in your journey to electrifying your fleet, from helping you develop a business case for change, carry out feasibility reviews or implementation including the various tax technical aspects.
Our teams bring together the expertise, innovative thinking and cross industry insight you need to assist you with this transition. Please speak to a member of our team to discuss how the transition to EVs and the net zero transition could affect your business.
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