VAT: Electric Cars and Hybrid Cars

There are some commonly held misconceptions about the VAT breaks for businesses buying electric and hybrid cars, even by car dealers trying to sell a new car. There have been a number of cases of businesses being advised by their car dealers that businesses can recover the VAT on the purchase of an electric car. What tax breaks does HMRC actually allow, and what are just misconceptions? Misconceptions and reality The first point is that HMRC has no special tax breaks for electric cars and hybrids. The VAT recovery position is that VAT can only be recovered on the purchase of the car if there is no private use at all, and that includes home-to-work journeys. So, a business can only reclaim the VAT on the purchase of the car if it is for 100% business use only. If a business leases the car, it can recover 50% of the VAT on the hire charges and all the VAT on any additional charges such as maintenance or roadside assistance. Scale charges The main tax break is on the motoring scale charges. The rules are exactly the same for electric and hybrid cars as for cars powered by fossil fuels; however, the savings come from the fact that the scale charges are based on CO2 emissions and as electric cars produce no CO2, they do not pay the scale charge, although the VAT that can be reclaimed on electricity use to charge the cars will be minimal. On the plus side, Hybrids will pay a scale charge, but because of the lower CO2 emissions the charge will be lower than for conventional cars.

Excise Duty

For cars registered since 1 March 2001, Vehicle Excise Duty (often known as road tax or car tax) is based on CO2 emissions. Due to their lower tailpipe CO2 emissions, car tax for hybrid cars is generally lower than it would be for a non-hybrid model. With CO2 levels being reduced by around 20%-25%, hybrid cars are placed three to four tax bands lower than would otherwise be the case.

Company Car Tax

When a company car is made available for private use, a benefit-in-kind rate is calculated based on the car’s value and its tailpipe CO2 emissions.

As hybrid cars have lower tailpipe CO2 due to their improved fuel economy, company car tax for hybrid cars is generally lower than it would be for a non-hybrid equivalent car. With CO2 levels being reduced by around 20%-25%, hybrid cars are placed many tax bands lower than would otherwise be the case.

Capital Allowances

For some green technologies, businesses are able to claim an enhanced capital allowance (ECA) intended to allow a company or organisation to set the whole cost of the asset (used for businessrelated activities) against its taxable profits in the first year following purchase.

Business-owned hybrids therefore can lead to significant savings in corporation tax within the year of purchase.

Congestion Charge

Electric vehicles (as well as hydrogen fuel-cell vehicles) are exempt from the London Congestion Charge.

However, vehicle owners must register for the cleaner vehicle discount (CVD) to benefit from this exemption, although, from Christmas Day 2025, they will become liable to the £15 a day charge.

Practical Tip

HMRC gives no special tax breaks to electric or hybrid cars; but due to the low emissions, there are savings on motoring scale charges and other direct taxes.

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