How can so many people can afford electric cars?
This might be a question you find yourself asking. So how can so many people can afford electric cars? like Tesla’s and similar vehicles?
The answer is…
People themselves can’t necessary afford them but there businesses can! Now, this doesn’t mean all luxury electric cars you see are driven by people working in big corporates. What it does mean is that electric vehicles are very tax efficient for companies. It doesn’t matter whether the company is a small business or a multi-million pound corporation, they get the same benefits.
So what are the benefits of owning an electric car for businesses? Well the main tax relief is First Year Allowances (FYAs). This is a Capital Allowance that reduces the company’s corporation tax bill. Basically, the total cost of the car (including VAT) can be deducted from the company’s profit before tax. For example, if you bought a £70K Tesla you could take this total cost and deduct it from your tax adjusted profit. This significantly reduces the tax adjusted profit which reduces the corporation tax paid. This is because corporation tax is a tax on profit therefore, the less you make profit the less tax you pay. In some cases a £70K Tesla could result in the company making a loss in the year. You might be thinking, “this is surely a bad thing?” However, the loss is simply a paper loss. Contrary to popular belief many business actually want to make a paper loss. Why? you ask. Well, as discussed earlier, corporation tax is a tax on profit therefore, if you don’t make a profit you don’t pay any corporation tax!
Wait there is more!
Now the benefits of First Year Allowances don’t stop there! If a business makes a loss they can surrender this loss for a FYA tax credit. This is basically a repayment from HMRC. This tax credit is calculated by taking the lower of the business loss or their FYA in the year. This figure is then multiplied by two-thirds of the corporation tax rate (currently 19% in the UK). For example, a business with a loss of £80K would get a tax credit of £10,133 (80,000*19%*⅔)!
Now not only have the business reduced their tax liability to nil but they are also getting a repayment from the government!
If you found this article interesting why not check out my article on the government’s electric car grant cuts.