A watershed moment for the company car?
Switching to electric could save employers millions with new tax rates
Company car tax rates set to change in April 2020
New company car tax rates that are coming into effect from April 2020 will result in the rate of company car tax available on fully Electric Vehicles (EVs) reducing from 16 per cent to zero per cent. This means that businesses can offer EVs to employees at a lower cost than petrol or diesel equivalents, resulting in major financial benefits to the employee and the company while also helping businesses to reduce their impact on the environment.
Based on our calculations, an employee could experience savings of 95 per cent or more over a four-year period by choosing an EV as their next company car instead of a diesel of comparative value, while a company operating a large fleet (900 or more vehicles) could benefit from savings in excess of £1.9 million annually by changing the profile of their fleet to electric.
As a result of these tax incentives, and a greater choice of models available, we expect EVs to be an increasingly common sight on UK roads with the largest leasing companies already reporting double, and in some cases triple, digit growth in orders for EVs. Auto manufacturers will need to review the scale of their production to accommodate the increased demand that is already being seen in the market. Meanwhile, employers providing company cars (including most businesses in the UK) should plan for the impact on their fleet profile and analyse the suitability of their existing fleet and company car policies.
The road to ‘net zero’ emissions
The demand for EVs is currently tempered by a number of factors including price, range anxiety and consumer fears over a lack of charging infrastructure. However, the positive environmental impact of EVs make their widespread adoption a necessary step towards achieving the UK’s climate change goals. In addition to pledging to reduce emissions as part of the Paris Agreement, it has committed to a ‘net zero’ target for greenhouse gasses by 2050. To achieve this, the government needs to tackle emissions from across the transport industry, which is now the highest emitting sector in the UK. Targeting corporate fleets has the potential to displace the maximum amount of fossil-driven miles, making ‘net-zero’ targets more achievable.
Introducing tax incentives
In July, the government announced new rules affecting company cars following a consultation earlier in the year on the future of vehicle taxes. The announcements included a clear tax incentive to support the adoption of zero emission cars with these vehicles attracting:
- a zero per cent company car tax rate being introduced for the 2020-21 tax year
- company car tax rates of one per cent and two per cent in the 2021-22 and 2022-23 tax years respectively.
The new tax rates are designed to increase the uptake of electric vehicles among fleet sales, which contributed 51.7 per cent of new car registrations in the UK in 2018. Based on our calculations, the new tax rules can make pure zero emission vehicles a much more attractive option for employers providing cars to their employees, as the Total Cost of Ownership (TCO) for these vehicles will now be cheaper than some of their petrol or diesel equivalents.
How the tax system works
In the UK, the employee income tax and employer national insurance cost of a company car are broadly calculated based on the value of the car multiplied by a percentage determined by the CO2 emissions, fuel type and electric range of the car in question. This calculation gives the value of the benefit in kind, and employees pay income tax on this at their marginal tax rate. For example, a diesel engine company car with CO2 emissions of 120g/km would have a company car tax percentage of 33 per cent from April 2020. If this is multiplied by a list price for the car of £25,000 the benefit in kind value for the tax year would be £8,250. As a result, a higher rate tax payer with a marginal rate of tax of 40 per cent would pay £3,300 in tax for the year (or £275 per month). In contrast, the new tax rules mean that there would be no income tax due for the year if the company car was a zero emission EV, and the income tax for a plug-in hybrid vehicle with an electric range of more than 130 miles would only be £17 a month.
When planning the profile of their fleet, companies will consider the TCO of a car including the tax, maintenance, running costs and insurance.
The following examples show the TCO from the company and employee perspective of company cars provided over a 48-month replacement cycle and travelling 10,000 business and 10,000 private miles per year.
Figure 1 shows the TCO for a business providing an EV or diesel version of a medium hatchback with a list price of around £30,000, or a premium SUV with a list price of around £70,000.
Figure 1. Company TCO examples
|Company TCO* (48 months)||Medium hatchback||Premium SUV|
|percentage savings achieved||21%||25%|
* The employer TCO includes the cost of lease rentals, maintenance, motor insurance, social security and business mileage reimbursement. The TCO shown is after recovery of any applicable VAT reclaims as well as applicable corporation tax relief. The TCO is the cost over the complete 48 month replacement cycle and also reflects any future changes in tax rules that are known at this point.
Source: Deloitte analysis 2019
The results show that for both example cars, the cost of providing an EV can be significantly cheaper than providing a comparable diesel engine vehicle (with potential employer savings in the region of 21 per cent to 25 per cent).
In some cases, the cost of financing an EV can actually be higher than a combustion engine equivalent, but there can be additional savings in national insurance, fuel/electricity and corporation tax relief that deliver a TCO saving. Using this example, a company that operates a large fleet (600 medium hatchbacks and 300 premium SUVs as an example) could experience annual savings of £1.9 million with total savings of £7.7 million over four years if they were to move their fleet profile to 100 per cent electric. The savings can also be attractive for smaller fleets, where close control on costs are often a top priority, with potential savings of around £100,000 per annum (assuming take up of 35 medium hatchbacks and 15 Premium SUVs).
Figure 2 shows the TCO for an employee being provided with a medium hatchback or Premium SUV as a company car.
Figure 2. Employee TCO examples
|Employee TCO* (48 months)||Medium hatchback||Premium SUV|
|Saving of moving to EV||£17,090||£47,397|
*The employee TCO includes the cost of company car tax, the cost of fuel for business and private mileage, less any business mileage reimbursement received. The TCO is the cost over the complete 48 month replacement cycle and also reflects any future changes in tax rules that are known at this point.
Source: Deloitte analysis 2019
The results from the employee perspective are quite dramatic, with potential savings of around 95 per cent coming largely from the new company car tax rates, with additional benefit from savings on fuel/electricity. Savings may also be possible where these cars are provided via salary sacrifice arrangements.
When the income tax savings of an EV are combined with the lower cost of electricity for private mileage (compared to petrol/diesel), the financial argument for EVs is compelling. However, while there can be major savings for businesses and employees, a number of factors outside of price will influence the success of the tax and national insurance incentives. For example, the cost of installing charge points at home the availability of on-street charge points and the suitability of vehicles available based on driving behaviour.
Stimulating demand creates challenges
The introduction of these new tax rates present a number of challenges to both the automotive industry and businesses that operate a company car scheme.
The potential impact on the automotive industry
A recent article by Fleet News (12 September 2019) cited the example of the UKs largest leasing company which has already seen a 123% increase in orders for pure EVs as a result of the new company car tax rates. As a result of this surge in demand, at least one major leasing company expects half of all new company car orders on their books to be either hybrid of zero emission EVs within the next two years.
Given the potential growth in demand for EVs within the fleet market over the next three years, OEMs should review their supply levels into the UK. The early stages of electric car supply have been (on some models) unreliable and OEMs will not want to miss out on sales through a lack of available vehicles. In addition, there are some EV manufacturers that do not currently provide cars for the fleet market. If UK demand for EVs is driven primarily by fleet sales, these manufacturers will need to reconsider their position and potentially build partnerships with fleet providers or risk losing market share. In turn, fleet providers will need to review their EV portfolio. This could mean building new relationships and negotiating different discounts with those providers that build models in-demand.
Beyond the manufacturers and fleet providers, there is also pressure on the finance side of the automotive sector. For example, there is a need to establish sensible residual values of these new vehicles. Set them too low and the desired increase in volumes will not happen; set them too high and there could be a significant deficit at the end of the lease.
The potential impact on employers
Many businesses have already signed up to the Climate Group’s ev100 initiative, making commitments that will see a wholesale shift to Electric Vehicles by 2030. These new tax rates offer an opportunity for businesses to achieve these commitments. However, there are several factors businesses should consider before making wholesale changes to their employee benefits and mobility schemes. Businesses need to consider the viability of using EVs if employees are required to travel long distances on a regular basis, with ‘range anxiety’ superseding the cost benefits offered by this scheme. In addition, most businesses do not yet have the infrastructure to support a large switch to EVs. Significant improvements will be required to make this viable in many workplaces, including investment in on-site charge points.
From an HR perspective, it is also important to consider whether salary sacrifice for EVs will actually work as an attractive benefit and a way of switching people from older private cars to newer EV company cars. Given the potential level of savings available, businesses should consider the way in which they provide EVs in order to share savings with employees and maximise the potential benefits of any new arrangements.
From a financial perspective, changing the profile of a fleet to electric is appealing. But with the majority of savings coming from tax and social security efficiencies, many businesses will need to seek out specialist tax advice to maximise their benefits and ensure they are compliant.
Once these, and other factors are taken into account, then businesses can look to develop their longer term fleet and EV strategy to ensure that it will be cost effective and deliver on its wider operational, employee and environmental objectives.