01 September 2022
For around 20 years, ‘first year allowances’ (FYAs) have been available for low-emission cars purchased for business use. The current rules enable tax relief to be claimed for 100% of the vehicle’s cost in the year of purchase. However, only qualifying low-emission or electrically propelled car purchases made on or before 31 March 2025 will qualify for FYAs. Expenditure incurred on the provision of electric vehicle charging points also qualify for FYAs, but only before 5 April 2023 for income tax purposes (or 31 March 2023 for corporation tax purposes).
Businesses of all sizes can claim FYAs on a car provided that:
- The car is ‘unused and not second-hand’;
- It is registered on or after 17 April 2002;
- It is an electric car, or a car with a car producing zero CO2 emissions; and
- The expenditure is incurred on or before 31 March 2025.
Increased demand for electric cars, coupled with well documented supply chain issues in the motor industry, mean that delivery of the vehicle can take months. For capital allowance purposes, expenditure is treated as incurred once an obligation to pay becomes unconditional. If payment is not required until delivery, this could delay the date that the relief becomes available. With the above dates in mind, timing is therefore important.
FYAs are designed partly to encourage businesses to invest in ‘green’ business assets, such as electric cars, with the incentive of obtaining tax relief for 100% of the cost in the year of purchase, and no upper limit to the amount of FYAs that can be claimed in any one year. If a car purchase does not qualify for FYAs, capital allowances are instead available at a maximum rate of 18% per year on a reducing balance basis. Depending on the value of the vehicle, this could take around 20 years for tax relief to be obtained in full for the cost of the car.
Take the example of a sole-trader, or a partner in a business, that purchases an electric car for £50,000 before 31 March 2025, with one that purchases the same car after this date. A purchase before this date can provide tax relief of up to £24,125 in year one, meaning the net cost of the car could be as low as £25,875. A purchase of the same vehicle on or after 1 April 2025 would provide tax relief of just over £4,342 in year one – a difference of over £19,780.
If the tax benefits of replacing existing CO2 emitting cars with new electric versions could perhaps be described as the ‘carrot’ to encourage businesses to invest in such assets, then the sunset clauses noted above could perhaps be the ‘stick’ to encourage businesses to make such an investment sooner rather than later, before time runs out.
It is worth noting that the sunset clauses have been extended in the past, most recently by four years in February 2021 (a number of weeks before the time limit was originally due to expire) from 31 March 2021 to 31 March 2025. There may be another extension in the future such as in the Autumn Budget, particularly as the government has been consulting on potential reforms to the UK’s capital allowance regime. But for now, time is starting to run out for businesses looking to maximise the tax relief for ‘green’ investments in electric cars and charging points.