Electric + hybrid cars – employers be aware of the 2020 changes

The Government has always announced company car rates well in advance to enable employers to plan ahead for their employee company car provisions. The recent Budget confirmed that, starting from the tax year 2020/21, electric cars will begin being taxed, at least partially, based on their “electric range”.

Since 2002, the company car benefit has been calculated by multiplying a car’s List Price by a percentage based on its CO2 emissions – the greener the car the lower the benefit charge. Where private fuel is also provided, the fuel scale charge is calculated using a similar principle, multiplying a flat annual amount (currently £22,600) by the same CO2 percentage that applies for the car benefit.

Current company car tax rates can be found in our 2017/18 Tax Rates.

HMRC have clearly recognised the increase in both the popularity and number of electric and low emission hybrid cars, as we have seen the planned percentage rates for Ultra Low Emission Vehicles (ULEVs) being ratcheted up since 2015/16 (purely electric cars had a 0% rating prior to 2015/16):

 Taxable % of List Price
 CO2 g/km  2015/16  2016/17  2017/18  2018/19  2019/20
 0 – 50             5            7            9          13          16
 51 – 75             9          11          13          16          19

 

Starting from the tax year 2020/21, cars with CO2 ratings below 50g/km (i.e. electric only and plug-in hybrid cars) will be taxed based on their “electric range” – which is the driving range of the car using only the power from its electric battery pack:

 CO2 g/km  Electric range  Relevant %
 Electric  0  N/A    2
 Hybrid  1 – 50  > 130    2
 Hybrid  1 – 50  70-129    5
 Hybrid  1 – 50  40-69    8
 Hybrid  1 – 50  30-39  12
 Hybrid  1 – 50  < 30  14
 Hybrid  51 – 54  N/A  15

 

What is apparent from the proposed 2020/21 bandings is the clear “cliff edge” that electric and low emission hybrids will face as they cross over from 2019/20 (16%) to 2020/21 (as low as 2%). Currently, car models such as the BMW i3, Nissan Leaf, Tesla or Volkwagen e-Golf would benefit from such rates, but more makes and models will no doubt follow over the coming years.

The UK currently has no plug-in hybrid cars on sale with an electric mileage range of 40 miles or more, which means that car manufacturers will need to focus their efforts to ensure that hybrids can benefit from those three lowest CO2/electric mileage range tax brackets in 2020/21.

Although higher emitting petrol and diesel company cars will continue to see incremental increases in their P11D values over the coming years, it is the drivers of ULEVs that will suffer the biggest tax increases over the next three years – followed in 2020 by the biggest tax savings.

This apparent inconsistency in government taxation policy over the next four years has led to accusations that drivers now switching to greener cars (particularly electric models) are being unfairly penalised in the years running up to 2020/21. Some commentators have also suggested that the ULEV market might suffer in the meantime as company car tax costs rise significantly between now and 2020.

What all this means is that employers who are looking to choose their employees’ next company cars will need to consider not just the tax rates in 2017/18, but what they will be during the intervening period through to 2020/21. With many car fleets now operating four-year replacement cycles, it is important that employers are aware of these forthcoming changes and educate their employees to reduce the risk them being hit by tax changes in the future.

For more information, please contact us at hello@garbutt-elliott.co.uk – 01904 464 100