Tax Benefits of Electric Vehicles for Sole Traders
(Posted on 08/02/24)
We're all familiar with the financial advantages of electric vehicles, especially given the government's incentives aimed at encouraging businesses to adopt greener transportation options and reduce emissions. However, these benefits vary depending on factors such as the vehicle's emissions, business structure, and the method of acquisition.
Sole Trader and Partnerships
Out Right Purchase
For those opting for an outright purchase of an electric vehicle, the ability to claim 100% of the purchase cost against profits for the year as a first-year capital allowance is a significant advantage. This provides a compelling incentive for businesses to consider lower-emission vehicles. In cases where there are no available profits in the current year, these allowances can be used to create a loss, which can then be offset against other incomes or carried back to previous years or future profits.
Alternatively, businesses can choose to claim allowances of 18% each year, gradually reducing the balance until the full cost of the electric vehicle has been claimed or sold. However, it's important to note that this option applies only to brand new vehicles; second-hand electric vehicles are eligible for the 18% annual allowance only.
It's crucial to consider the business use aspect, as personal use of the vehicle will restrict the allowable capital cost.
For those opting for hire purchase, similar rules apply as for outright purchases, with the ability to claim either 100% of the vehicle's capital cost or an annual allowance of 18%, depending on whether it's a new or second-hand electric vehicle. However, input VAT does not tend to be retrievable on hire purchase.
Following this the interest on the agreement is an allowable business expense. But again, if there is any personal; use of the vehicle both the interest and capital cost will restricted in result of both personal and business use.
Leasing presents a different scenario, as businesses do not own the vehicle. Therefore, there's no allowable allowance deduction for the cost of the vehicle. However, businesses can deduct 100% of the monthly payment from profits, with restrictions applied if the vehicle is used for personal purposes as well. Additionally, 50% of the VAT is recoverable.
Understanding these nuances is crucial for businesses navigating tax implications and making informed decisions regarding electric vehicle acquisition and usage.
Similar to Hire Purchase however with finance car is given back at the end of the agreement due to the fact the vehicle is never legally owned by the business. Therefore, tax relief is given in a different way as he tax relief is given on the depreciation of the asset which has been charged to the profit and loss account, along with the interest charged on the lease.
Though it is key to not that this is restricted to 15% if the vehicle is emitting CO2 emissions over 50g/km.
As a Sole trader the allowable deduction is restricted to just business use element of the lease.
Operating lease which are for short term car rentals get their tax relief on the cost of the rental payment over time. But same as a finance lease there is restriction to 15% if the vehicle is emitting CO2 emissions over 50g/km and As a Sole trader the allowable deduction is restricted to just business use element of the lease.
Flat Rate Expenses
With your mileage you can claim a flat rate expense of 45p per mile, for the first 10,000 business miles then after that the flat rate expense reduces to 25p per mile thereafter each year. You are also able to claim interest of either hire purchase or finance lease but thus restricted to business use only.
However, if you choose to claim flat-rate allowances for a vehicle, once you make this choice, it cannot be changed or reversed for the entire duration of that vehicle's lifetime. If the vehicle is being provided to an employee there provided for the employee's use, there won't be any adjustment made for private use in your allowances. This means that the cost of providing the car will not be reduced to account for any private use by the employee.
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