Does buying an electric car give you special VAT treatment? In reality, the situation is more complex. Although electric and hybrid vehicles may offer significant tax benefits, VAT is typically included in the purchase price, and businesses can recover it only in specific circumstances.
The treatment of VAT on electric and hybrid cars depends on several factors, including how the vehicle is used, whether it is purchased or leased, whether there is any private use, and whether the business is VAT registered.
This guide outlines the current UK rules on VAT on electric and hybrid cars, helping you understand when VAT applies and the circumstances under which it may be reclaimed.
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What is VAT On Electric Cars in the UK?
Before understanding VAT on electric and hybrid cars, you need to know what VAT is on electric cars. In the UK, Value Added Tax (VAT) is a consumption tax applied to most goods and services. The standard 20% Value Added Tax (VAT) is charged on the sale of most new and used vehicles in the United Kingdom. This applies to fully electric vehicles, plug-in hybrids (PHEVs), self-charging hybrids, and petrol/diesel vehicles.
Is There VAT On Hybrid Cars?
Hybrid vehicles may offer improved fuel efficiency, and many people assume there is no VAT on electric and hybrid cars. This is not true. However, they are not exempt from VAT; like petrol and diesel cars, these vehicles are subject to a 20% VAT rate. The ability to reclaim VAT depends on whether the vehicle is intended for personal or business use.
So, in simple terms, electric and hybrid cars are not VAT-exempt, even though they are low-emission. Some hybrid vehicles may qualify for lower Benefit-in-Kind (BiK) rates than petrol or diesel cars, but fully electric vehicles generally receive the lowest BiK rates. It is important to keep in mind that the standard 20% VAT applies to the purchase or rental of both hybrid and electric vehicles.
Look at the table to better understand VAT on electric and hybrid cars:
| Feature | VAT Charge | Electric Cars | Hybrid Cars |
| VAT on private purchase | 20% | Cannot claim VAT if the car is used for private purposes | Cannot claim VAT if the car is used for private purposes |
| VAT on lease | 20% | If the car is for private use, can reclaim 50% VAT | If the car is for private use, can reclaim 50% VAT |
| VAT on public charging/fuel | 20% | VAT may be recoverable on business charging costs where the normal VAT recovery rules are met. | VAT recovery follows the normal HMRC rules for petrol or diesel fuel used for business purposes. |
| VAT on maintenance | 20% | Usually reclaimable | Usually reclaimable |
Note: VAT on public charging for electric cars and hybrids is charged at the standard rate of 20%. Electricity supplied to domestic properties is generally subject to the reduced 5% VAT rate.
How Does VAT on Electric and Hybrid Cars Work in the UK?
In the UK, VAT on electric and hybrid cars are subject to the standard 20% rate, regardless of whether you buy the car outright, finance it, or lease it. In general, VAT cannot be reclaimed on outright purchases unless they are used exclusively for business purposes. Where there is private use, businesses can normally recover 50% of the VAT on lease rentals, while VAT on qualifying business running costs is generally recoverable in full.
Let’s understand with an example
For instance, if you are buying a new hybrid vehicle for £40,000 before VAT, you are required to pay 20% VAT on it, amounting to £8,000. Therefore, the vehicle’s total cost will be £48,000.
Can You Reclaim VAT on Electric and Hybrid Cars?
If you are purchasing an electric vehicle for business purposes, you may be eligible to reclaim VAT, depending on the vehicle’s use and HM Revenue and Customs (HMRC) regulations. To claim VAT on electric and hybrid cars, you need to be a VAT-registered business, and the car is used exclusively for business. Moreover, if you are a private customer, you are not eligible to reclaim VAT. Additionally, other regulations apply to leased vehicles.
When To Claim
- If the vehicle is exclusively used for business purposes and is not available for private use, a VAT-registered business may reclaim 100% of the VAT on the purchase.
- You cannot reclaim VAT on electric and hybrid cars if the vehicle is available for private use by employees or directors.
- Additionally, the VAT on the purchase cannot be reclaimed if the vehicle is used for any private purposes, such as commuting.
Can You Reclaim VAT on a Car for Personal Use?
As mentioned above, in the United Kingdom, you generally cannot claim VAT back on a vehicle purchased for personal use. Unless the vehicle is used exclusively for business purposes with no private use, input tax recovery on cars is prohibited under HMRC regulations. Typically, a business can reclaim only 50% of the VAT if the car is leased for both business and personal use.
How Much is VAT On Electric Cars?
To fully understand VAT on electric and hybrid cars, it’s important to know how much VAT applies to electric cars. As discussed earlier, electric cars are subject to the standard 20% VAT at the time of purchase. However, the VAT treatment varies considerably depending on whether you are purchasing, leasing, or paying for electricity to operate a vehicle.
VAT on Purchase of Electric Car
Purchases of new electric vehicles are typically subject to a standard 20% VAT, similar to those of petrol or diesel vehicles. Moreover, a VAT-registered business is eligible to reclaim 100% of the VAT, provided that the vehicle is used exclusively for business purposes and is not available for private use. Normally, the purchase VAT is not recoverable if the vehicle is used for personal or commuting purposes.
VAT on Leasing An Electric Car
Under rules for VAT on electric and hybrid cars, a VAT-registered business can reclaim 50% of the VAT on lease payments when the vehicle is available for business use.
VAT on Recharging Costs
Understanding the costs of charging has become increasingly crucial as electric vehicles (EVs) continue to gain popularity. It is important to know that the VAT on EV charging electricity is entirely dependent on the location where your vehicle is charged.
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Charging at a Public Station
VAT is charged at the standard rate of 20% when charging electric vehicles at public electric vehicle stations. VAT may be recoverable where the charging relates to business travel and the normal evidence and VAT recovery rules are satisfied.
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Charging at Home
When charging your electric vehicle at home, the electricity supplied through the domestic electricity account is typically subject to VAT at 5%. This implies that the VAT rate charged when charging at home is typically 5%.
What is the 80% Rule for EV?
The term “80% rule” is commonly used to describe battery charging guidance rather than a UK tax rule. Many manufacturers recommend charging an electric vehicle to around 80% for everyday use to help preserve long-term battery health. It has no direct impact on VAT or HMRC tax treatment.
What is Corporation Tax Relief on Hybrid Cars?
When it comes to understanding VAT on electric and hybrid cars, it is important to know how corporation tax relief applies to hybrid cars. The tax benefits for hybrid cars depend on the vehicle’s CO₂ emissions and electric-only range. Corporation Tax relief depends on the vehicle’s CO₂ emissions, purchase date and the applicable capital allowance rules. Fully electric vehicles generally receive the most favourable tax treatment.
Capital Allowances
The capital allowance treatment depends on the prevailing HMRC rules for the accounting period, including the vehicle’s CO₂ emissions and whether it qualifies for first-year allowances or writing-down allowances.
Benefit-in-Kind (BiK)
Benefit-in-Kind (BiK) rates for electric cars are significantly lower than those for hybrid, petrol, and diesel vehicles. However, the exact percentage depends on the vehicle and the applicable tax year.
The Bottom Line
The VAT position is not always straightforward, but the benefits of choosing an electric or hybrid car can be significant for businesses. Furthermore, the rules for VAT on electric and hybrid vehicles depend on the type of vehicle, whether it is purchased or leased, how it is operated, and whether private use is allowed. Before purchasing the vehicle, it is advisable to review the VAT treatment to prevent costly errors and ensure that any eligible VAT is claimed correctly.
Whether you’re just forming your company or already knee-deep in paperwork, our London-based accountants are ready to jump in. One quick call and we’ll figure out what you actually need.
Struggling to Understand VAT on Electric and Hybrid Cars?
If you are still uncertain about the rules for VAT on electric and hybrid cars, you are not alone; we are here to help you. At LimitedCompanyAccountants, our accountants can review your purchase or lease agreement, review the business and private use, and determine whether any VAT is recoverable. We also ensure that the costs are accurately recorded in your VAT returns and accounts.
Disclaimer: The information provided in this article is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.
