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Elon musk the face you make memeWhen you discover HMRC's E-car VAT Rules

It’s not 5% anymore

HMRC has now clarified the VAT treatment of the supply of electricity for electric vehicles, but the result is not exactly what most people expected.

Where do most of us charge our E-car?

Usually at home, as the electricity supplied to your home qualifies for the reduced rate of VAT of 5%, providing your usage is less than 1,000 kilowatt hours a month. I suspect I’m not alone in wondering what a kilowatt hour equates to in the real world, so I did a bit of research and found that the average UK home uses 350kWh per month and, for example, for just 50 kWh you could run your fridge/freezer for a month.  It is therefore not surprising that almost all households, and many small business premises, qualify for the 5% rate and are charged VAT accordingly.

E-car VAT: What have HMRC said?

The Treasury have now stated that electricity provided to the general public via charging points, such as at a Motorway Services, will not qualify for the reduced 5% rate, as it is not an ongoing supply to a single customer’s property, rather lots of ‘one off’ supplies to lots of different people at the supplier’s property.

I quickly checked the relevant VAT Act, and this new interpretation by HMRC is not quite what the legislation seemingly says; VATA 1994 refers to a supply to a person at any premises where the supply to that person by the supplier does not exceed 1,000 kWh/month. There is no mention of any issues with there being several persons receiving a supply from a single premise. However, unless HMRC change their minds, electricity purchased from commercial charging points will attract VAT at the full 20%.

Well, at least now we know what VAT you will be required to pay to charge your car, the next question is, assuming you are VAT registered, can you get it back. The answer, as it so often is with VAT, is ‘it depends’.

E-car VAT: Sole traders

If a sole trader charges their car at home, they can recover the VAT paid on the business proportion of the cost. As for other fuel costs, the simplest way to work out the business use is to record and split the mileage driven each period and apply the business use percentage to your monthly bill.

The sole trader would need to record how much electricity was used to charge the car and the cost to them of doing so based on the cost per kWh which should be shown on the bill, and the VAT rate is almost certainly going to be 5% VAT. Similarly, if they incur VAT charging their car elsewhere, at a public charging port or their business premises, they can again recover the 20% VAT on the business element of the cost.

E-car VAT: Partnerships

The wording of HMRC’s clarification, states that for VAT purposes a partnership itself must incur VAT for it to be recoverable. This clearly implies that a partner in this instance would be akin to an employee, with the partnership being unable to recover any VAT unless the charging took place at the business premises and with a car owned by the partnership. However, when I checked up with HMRC they confirmed that their new interpretation of the VAT Act would allow any partner to charge their vehicle at their home, subject to the normal rules surrounding private use.

E-car VAT: Employees

When the driver is an employee, the new rules are clear that if he or she charges a car at their home, the employer cannot recover any VAT on this cost, even when the employee is charging the vehicle on behalf of his employer.

This is because HMRC consider that the supply has been made to the employee (who is not VAT registered) and not to the business. Therefore, the business has no ability to recover the VAT suffered in relation to the charging. The same would apply were the employee to charge their car at a public charging point.

On a slightly brighter note, if the employee charges a car owned by their employer at the employer’s premises, VAT recovery is permitted. Also, if the employee is allowed to take the car home, the employer can recover all of the VAT and then pay over VAT to HMRC for the deemed supply relating to the private use element.

Tax Accountant’s view

The exclusion of claims for cars charged at the employees home seems very unfair to me and is clearly against the spirit of the government message of encouraging green fuels. At present, if an employee fills their car up with petrol or diesel they can pass on their bill to their employer, to enable him or her to recover the business proportion of the VAT on the fuel costs as if they had incurred them directly. So why not apply the same principle when the fuel is electricity?

All answers on a postcard to Rt Hon Rishi Sunak, Number 11 Downing Street, LONDON, SW1A 2AB!