The VAT treatment of electric cars

17 January 2022

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

With 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 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’.

VAT on recharging costs Where a vehicle is recharged at a driver’s 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 treated as either petrol or diesel, and the corresponding advisory rates apply.

In theory, where an employer pays a mileage allowance for business use, it should be entitled to recover the VAT cost of the fuel element. There are several apparent difficulties with electric cars.

If the driver charges the car at home, there would have been a VAT charge of 5%. Therefore, it could be argued that 1/21 of the 5p is VAT. However, HMRC maintains that the supply of domestic power is to the individual, and VAT is not deductible by the business. There has always been a similar argument, brought in an action by the European Court of Justice (ECJ) against the UK, that petrol supplied at a petrol station is to an employee and not the business. But it was accepted, by way of compromise, that VAT could be recovered provided the employee submitted receipts to cover the cost of the fuel element of the mileage claim. Presumably, an employee’s electricity bills could be provided in the same way.

Where a driver recharges at a public or commercial facility, the charge would, as previously discussed, be subject to VAT at 20%. There ought to be no problem for the supplier to provide an invoice, and in this case, the VAT element of the 5p per mile would be 1/6.

But what if the driver recharged at a free facility provided by a vehicle manufacturer? Or at the employer’s premises where the employer would have already recovered the VAT on the cost of the electricity?

In theory, this could lead to the employee submitting VAT receipts for recharging at commercial facilities that cover all the business miles undertaken, even though the recharging for the total business and private mileage was undertaken in a mixture of ways.

There are third party solutions for managing electric vehicle charging costs that allow businesses to accurately identify charging costs and locations (at their employees’ homes and elsewhere).

It would seem perfectly reasonable, therefore, that, where the VAT on the total cost of recharging a vehicle can be accurately identified, the business element should be recoverable on a pro-rata basis.

There is suggestion that no VAT should be recovered on mileage rates for electric cars, but this does appear to be a too simplistic approach to tackling an issue that needs to be reviewed in detail.

In conclusion The decision to use fully electric cars, while delivering environmental benefits, doesn’t confer any VAT advantage. The rules for VAT recovery on acquisition are no different from those for other vehicles.

When it comes to recharging, particularly recovering VAT on the mileage allowances, the rules appear very disjointed and somewhat confusing. Further clarity from HMRC would be most welcome.