Are hybrid cars worth a second look for business owners?

James Shipp
James Shipp, Partner for Lovewell Blake

Tax savings are not the only consideration for company car drivers ‘going green’ and more and more often we are seeing a reversal of the green revolution.

James Shipp, Partner for Lovewell Blake

Over the past few years many company car drivers, and in particular Directors of owner managed businesses, have purchased or leased new Electric Vehicles (EV’s) to benefit from the significant tax incentives available. However, as life with an EV starts to become a reality many are now taking a step back and reassessing hybrid cars as a stop gap until infrastructure is compatible with a fully electric life. Whilst the performance of an EV, significant tax savings and the fuzzy feeling that you are doing something for the environment have motivated many to plunge into the EV revolution, a new term many will be familiar with must be the phrase of moment for many eco-motorists – range anxiety!

Company car users pay tax on the provision of a vehicle from their employer, whether that be an employee with a company car as part of their package, or a Director/owner of the company. The amount of tax paid is based on the new list price of the car and a percentage dependant on the CO2 emissions. For gas guzzlers, this percentage could be well in excess of 30% but for new fully electric cars the percentage started at 0% and has graduated to a current rate of 2% which has been locked in by the current government. At this level the EV choice still makes significant sense.

Add to that the benefit to the employer/company where purchases of new EV’s can be offset against Corporation Tax in full and if leased, the lease premiums will be tax deductible each year. The purchase route was popular initially, but we are seeing more choose to lease now so that they can spread the tax relief over the life of ownership rather than a spike in year one (with potentially a tax liability on the residual value when the car is sold or traded in). Either way though, the incentive is certainly worthwhile.

However, life with an EV is not all plain sailing and for many who undertake reasonable length journeys on a regular basis we are starting to be asked about the hybrid alternative. For some time, hybrids have been seen as a halfway house, just as expensive to buy but without the incentives. We are starting to see some credible alternatives to EV’s emerge in the hybrid market now. If we go back to the basic Benefit in Kind calculation, some hybrid cars with an electric only range in excess of 70 miles on a full charge now carry a 5% Benefit in Kind rate, others with a lower electric only range can still achieve an 8% rate. Not as competitive as 2% but still closer than we have seen in the past.

Couple that with the reduced motivation to spike the Corporation Tax relief in year one and rather spread it over the coming years (especially with Corporation Tax rates rising) and the hybrid option, with its 18% per year writing down allowance against Corporation Tax, is starting to gather momentum. Switch the car to EV mode for the daily commute and let the engine kick in on longer journeys.

As the national charging infrastructure improves, we expect that EV’s will have their day again and many converts will not turn back but until then the compromise option can be both practical and affordable.

Thinking of purchasing a new car, speak to one of our tax specialists about the tax incentives available to you.

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