Climate change has featured heavily in the news headlines recently, with various political parties renewing their commitment to reducing carbon emissions. This comes amidst the backdrop of protests in large cities highlighting the risks to future generations of not acting to safeguard the environment.

The Scottish Government recently signalled its commitment to reducing Scotland’s carbon footprint with a target of net-zero emissions by 2045, some years ahead of the UK wide target.

The tax system has, for several years, encouraged businesses to opt for lower emission vehicles. The increased availability of zero and low emission cars may allow more businesses and their employees to benefit from the tax reliefs that are available in the years ahead.

Capital allowances on cars

Whilst expenditure on cars does not qualify for the 100% Annual Investment Allowance (AIA), businesses of all sizes can still currently claim 100% first year allowance on the purchase of new cars which are electric or have C02 emissions of less than 50 g/km. A 100% first year allowance is also available for the cost of installing electrical charge point equipment at a business premises.

The capital allowances available for second hand cars, and new cars with C02 emissions above 50 g/km, are far less generous. Cars not qualifying for the first year allowance should qualify for Writing Down Allowances at a rate of 18% per annum if their C02 emissions do not exceed 110 g/km (130 g/km before April 2018). Cars with C02 emissions above 110 g/km should qualify for a reduced rate of writing down allowances of 6% per annum (8% per annum before April 2019).

Where a car is leased rather than owned, the allowable lease cost for the business is restricted by 15% where the C02 emissions exceed the 110 g/km threshold above.

A decision to buy an electric or low emission car can in some cases make a significant impact on the tax liability of the business. Tax relief on higher emission cars will generally be over a much longer period, in some cases after the vehicle is no longer owned by the business.

Benefit in kind

The benefit in kind rules for employees are also more advantageous for electric and low emission vehicles and the company car benefit system will change to provide even greater incentives to employees using zero or low emission company vehicles from 6 April 2020. This is in line with the stated aim of the UK Government to encourage all drivers to have convert to zero emission cars and vans by 2040.

Company car benefit is calculated as a percentage of the manufacturer’s list price of the vehicle when new, which is linked to the C02 emissions of the vehicle and this same percentage is used for the purposes of company car fuel benefit. The value of the benefit is taxed on the employee at their applicable rate of Income Tax and the employer is subject to Class 1A National Insurance (currently 13.8% of the benefit).

From the 2020/21 tax year, the appropriate percentage for zero emission cars is expected to drop from 16% to 2% of the manufacturer’s list price, while the rate of tax for cars with C02 emissions between 1 g/km and 50 g/km will depend on their electric range of the vehicle (between 2% and 14% of the manufacturer’s list price). Cars with C02 emissions of between 51 and 54 g/km are expected to be taxed at 15% of the manufacturer’s list price, after which a one percentage point increase applies per 5 g/km.

For higher emission cars, the maximum benefit in kind for a company car remains at 37% of the manufacturer’s list price, illustrating the significant tax savings for both employee and employer of a decision to purchase an electric or low emission car.

Employers who provide a charging station at an employee’s workplace can do so without giving rise to a taxable benefit in kind.

So, should I buy electric?

The incentives are clear by considering an example.

If an employee was provided with a fully electric company car such as a Volkswagen e-Golf with a list price of £33,240, the employer should receive a 100% first year allowance to reduce its taxable profits provided the vehicle was bought new.

Once the new benefit in kind rules take effect in April 2020, the taxable benefit in kind for the company car would in this example drop from £5,318 in the 2019/20 tax year to just £665. This should achieve a tax saving of £1,908 for a Scottish higher rate taxpayer and the employer would also save Class 1A National Insurance of £642.

Whilst there was already a lower benefit in kind for low emission cars, when the post April 2020 rates are compared with the much higher benefits in kind for cars with higher C02 emissions, there is the potential for there to be a clear tax advantage of purchasing an electric or low emission car in the years ahead.

With an expectation of electric and low emission cars being more widely available, including cars at lower bands of list price, these vehicles will become a realistic option commercially for more businesses to provide as company cars. As technology develops and the availability of electric charging points increases, the expectation would be that the electric range would improve and make electric and low emission cars more viable than they may have been in the past, particularly for businesses based in rural areas.

• Chris Campbell is a tax senior manager at Johnston Carmichael.