CLIMATE CHANGE and sustainability are currently on everyone’s agenda, with society being encouraged to take steps to reduce its carbon footprint wherever possible.
As part of this, the Government has introduced various tax reliefs and favourable treatments for electric cars, encouraging business owners and individuals to opt for the new Tesla or Porsche Taycan as opposed to the petrol or diesel alternatives.
In today’s Shipleys Tax blog, we consider one of the most frequently asked VAT question: whether VAT can be reclaimed on the purchase or lease of electric cars. Note, the comments below are intended only to be a general guide and not advice on a VAT reclaim.
VAT reclaim on electric vehicles
From a VAT perspective there are no special reliefs relating to electric vehicles. So currently, electric vehicles are subject to the same rates of VAT as their diesel or petrol counterparts, i.e. 20%. Further to this, the rules for reclaiming VAT incurred on an electric vehicle depends on whether it is purchased or leased and is the same as for non-electric vehicles:
- Leased cars – where an electric car on lease is available for any private use, only 50% of the VAT paid can be recovered. This is to take into account the private element of the vehicles use. Note however, VAT paid on any servicing or maintenance charge can be recovered in full. As such it is more tax efficient to ensure that a service contract is taken separately to the lease.
- Purchased cars – where an electric car is purchased but available for private use (e.g., has private insurance, is kept at home over night etc) no VAT is reclaimable. This includes cars purchased outright, hire purchase cars and generally personal contract purchases.
- Commercial vehicles – commercial electric vehicles such as vans, lorries etc with incidental private use are entitled to full VAT recovery. It is worthwhile noting that for VAT purposes commercial vehicles also include certain types of pick-up trucks and modified cars.
How to reclaim all the VAT on electric cars
This is a complex area and quite beyond the scope of this blog. However, in some very specific circumstances, businesses may be entitled to recover full VAT on electric cars. This is where businesses can show that the car is used wholly for business and NOT available for private use. Typically this applies only to “pool cars” and cars use in a trade (e.g., taxi or vehicle leasing business). Whilst in theory it may be possible to argue 100% recovery on other cars under the “wholly for business” case, in practice it is a different matter altogether. Detailed evidence would need to be maintained proving the car is only available strictly for business and no private use is allowed. This could be for example ensuring the car is only insured for business journeys, or the car is only kept overnight at business premises, or contractual restrictions provide that the business only journeys are allowed. There is no standard process here and HMRC would certainly look to challenge the VAT treatment, as such this is an exception rather than the rule and would need careful planning.
Charging electric vehicles: Reclaiming VAT
HMRC currently allow recovery on VAT on electric charging costs on the following basis:
VAT incurred on charging an electric vehicle at home for sole traders and or partners in a business can be recovered on the business miles only. As such, HMRC expect detailed mileage records to be kept showing the private use.
This does not apply to employees of a business as the supply of the electricity in this case is made directly to the individual employee and not the business, therefore does not meet the business test.
Business miles incurred by sole traders, partners and employees can reclaim the VAT they incur when charging their vehicles at a public charging point. Mileage records detailing the business usage should be kept supporting the reclaim.
Charging at a business premises
Where vehicles are charged at the business’s premises, and are used for business and private mileage, a record detailing business and private use should be kept.
The business has two options in this case as follows:
- The business can restrict the VAT it claims on electricity and reclaim VAT only on the electricity used for business purposes; or
- Reclaim all VAT on the cost of electricity and pay output VAT to HMRC on any electricity used privately.
HMRC to ease VAT burden?
Currently, these methods for VAT recovery involve significant amount of record keeping and administration for what is potentially small amounts of VAT recovery. HMRC have taken note of this and are considering simplifications which may reduce the burden of evidence on currently imposed – so watch this space.
If you are planning on purchasing or leasing an electric vehicle and would like to know whether you can recover the VAT, please call 0114 272 4984 or email firstname.lastname@example.org.
Please note that Shipleys Tax do not give free advice by email or telephone.