Electric cars, car allowance drivers and double cab pick ups

Peter Moroz gives his annual update on some of the developments in tax complexities relating to cars and vans

Charging electric cars at home vs. paying mileage allowances

Company cars

After much lobbying by the CIOT, HMRC have finally relented on their position and now agree with us on the law concerning reimbursements for home charging of company Electric Vehicles (EV):

The updated HMRC guidance at EIM23900 now states the following in relation to company cars used for business and private mileage:

The exemption under s.239(2) ITEPA 2003 means there is no separate charge to tax under the benefits code where an employer reimburses an employee for the cost of electricity to charge their company car at home. Employers will need to ensure that the reimbursement made towards the cost of the electricity is solely for the company car.
The little sting in the tail is the requirement for the employer to be able to show that reimbursement relates solely to the company car, but there are increasingly technological solutions to help them do so with apps linked to home chargers showing the actual usage.

Elsewhere in HMRC guidance, it gives the Advisory Electric Rate (AER) which can be used to reimburse business mileage in relation to a company EV; this is currently 9ppm.

9ppm is still a bit mean, especially as the cost of charging at motorway services can be as high as 19ppm. Also, paying by reference to mileage seems now to be a hugely tax inefficient way of reimbursing costs of charging. I have seen some companies who want to reimburse a “fair amount” in respect of business mileage who are paying 9ppm tax free plus a taxable top up of a further 6ppm for business mileage to ensure drivers are not losing out. Instead, they could put in place a mechanism to reimburse 100% of charging cost and it would all be tax free. If they didn’t want to be that generous, they could then require a contribution from the driver towards private mileage. It would still produce savings.

Private Cars

In contrast to the above reimbursing home electricity costs for a private car is still a taxable benefit. So, paying a reimbursement by reference to business mileage can make more sense as the current rate is 45ppm for the first 10,000 miles. The Employment income Manual deals with this as follows:

If by reference to mileage, AMAP rules apply for business miles travelled. Any amounts in excess of AMAP rates would be taxable. If less than AMAPs rates, employee may claim appropriate amount of tax relief under MAR for business miles. If a flat-rate amount is paid it is taxed as earnings.

VAT recovery on charging electric cars at home

The question of VAT recovery by an employer who reimburses home electricity costs is still in limbo and there has been no movement from HMRC since January 2022 when they withdrew their previous guidance (which said there was no VAT recovery) to say that they were thinking about it:

Motoring expenses (VAT Notice 700/64)8.4.1 Electricity paid for by employees
We are considering the situation where an employee is reimbursed by the employer for the actual cost of electricity used in charging an electric vehicle for business purposes.
This is to determine what evidence can be practicably provided, to allow the employer to claim the related VAT, subject to the normal input tax rules.

8.4.2 Simplification measures
We are also considering other simplification measures that may reduce administrative burdens in terms of accounting for VAT on private use.

When I last contacted HMRC in March 2024, I was assured that they are still thinking about it!

Car allowance drivers and business mileage

Moving on from company EVs to car allowance drivers in general. Following the outcome of the Willmott Dixon case last year, every employer who paid car allowances to drivers who drove business mileage can make a claim for a refund of National Insurance contributions provided they fit into the criteria in the below.

The fact pattern in many companies is similar. A company pays a car allowance. This may be as an alternative to a company car. It is often treated differently from salary when it comes to pay rises. It is typically set by reference to the grade of the employee such that more senior employees are entitled to a bigger car allowance.

In return for the car allowance, the employee is required to have an appropriate car available for business travel and to service / maintain and insure it for business travel. There may or may not be an additional payment by the employer for fuel costs. Many companies use the HMRC Advisory Fuel Rates for company cars to determine the rate of payment for business travel, but they can pay whatever they like. Some provide fuel cards.

The issue at hand, in broad terms, is that when an employer pays a mileage rate for business travel of less than 45ppm, but also pays a car allowance, then part of the car allowance could be regarded as free from National Insurance (NI) to the extent that the total payment for business mileage does not exceed 45ppm.

Because of the Willmott Dixon case which I am proud to say I advised on, the Courts agreed that a claim can be made to HMRC going back to the previous 6 tax years for the refund of National Insurance.

As an illustration, if an employer had 100 drivers who drove 10,000 business mileage pa each and were paid 10ppm, then, depending on the car allowance, the potential refund claim for employer’s NI is £289,800.

A more detailed explanation is given in the Tax Adviser Article I wrote last September.

In October 2023, HMRC included a section in their Employer Bulletin about how to make NI corrections via RTI. Whilst I agree with HMRC that it should be possible to make such amendments if you are still in the same tax year, it appears that the software often used, and the mechanisms suggested by HMRC are impractical once the tax year has ended and the final FPS has been submitted. The only practical mechanism is to apply for a refund of NI directly.

We are not talking about just a refund of secondary NI, but also primary NI paid by the employee.

Also, it is not just a question of claiming a refund for past years, but reducing the NI on car allowances going forward. This involves having a payroll wage type whereby the car allowance can be split on the payroll so that part is paid taxable but NI free and the rest is taxed and subjected to NI.

Given that the employee can also make a claim for tax relief up to 45ppm, you might also be wondering whether a part of the car allowance can be paid tax free too, to save the employee the effort of putting a claim on form P87. However, I would advise against this, as HMRC may then argue that the Optional Remuneration OpRA rules apply. If OpRA applies this would then mean that there is no tax relief (nor NI relief)! Such an argument is in my opinion nonsensical, as OpRA was never intended to be triggered by an employer’s view on whether or not a payment should be subject to PAYE, but nonetheless HMRC have raised this issue in some instances.

When is a van not a van?

In a tax case involving Coca Cola a few years ago, VW Kombi and Vauxhall Vivaro vans were adjudged by the Courts to be classified as cars for BIK purposes. These looked like vans to most observers, but the issue was in the definition of a van in tax law. S 115 ITEPA 2003 defines a van in terms of being a “goods vehicle” of under a specified weight. A “goods vehicle” is a vehicle of a construction primarily suited for the conveyance of goods. If it is not a van or a motorcycle, then it is a car.

The Courts considered the words in italics in great detail and decided that because of the way the vehicles in questions were constructed; there was a point in the manufacturing process where the finished product could have either been a people carrier or a goods vehicle. Therefore, because of the common elements in the manufacturing process they did not meet the primarily suited test and so the “goods vehicle” definition did not apply. They were therefore cars.

Cars have a taxable BIK of Retail Price x CO2%

Vans have a BIK of £3,960, i.e. a lot less than what it would be if they were classified as cars.

On 12 February 2024, HMRC decided to announce that the same logic should apply to Double Cab Pick up trucks which they had previously said would be regarded as vans. This meant that from July 2024, they would be taxed as cars and the BIK would increase massively (subject to an element of grandfathering).

Following intense lobbying by farmers and the auto industry, HMRC reversed their position less than a week later and said the law would be changed to the effect that double cab pick ups would continue to be taxed as vans, not cars. It is good to see common sense prevailing.

Peter Moroz

Article written by Peter Moroz and featured in 'Employment Taxes Voice', issue 9 April 2024.