HMRC clarifies tax on electric car charging

Electric cars are becoming ever more common on our roads, and having narrowly avoided been hit by one of these silent assassins (several times), I can concur that their numbers are rising rapidly.

The biggest rise in ownership is by businesses, both large and small. This has been driven by very attractive tax benefits, not available to petrol and diesel vehicles. However, there has been a lot of confusion and disagreement as to whether HMRC guidance on businesses reimbursing their employees for the cost of charging a vehicle at home was correct.

HMRC, to their credit, has HMRC has urgently updated its Employment Income Manual to bring the guidance on charging electric cars at home in line with current tax legislation. Having accepted that the original guidance was not only confusing, but in a few areas actually wrong.  The revised guidance, whilst an improvement on the original, does appear to have introduced a new restriction.

Let me ask you a question…

If a company provides an employee with a company car for which there is no business use (100% private use) and the employee has to replace tyres on the car, meeting the cost personally and then claiming reimbursement from the company, does that reimbursement give rise to a taxable benefit in kind (BIK)?

The answer of course is no, and nobody would suggest otherwise. It makes no difference whether the car is used wholly privately, part private part business or wholly for business.

What does the company car tax legislation say?

The tax legislation states: “No liability to income tax arises in respect of a payment to an employee in respect of expenses incurred by the employee in connection with a taxable car or van or an exempt heavy goods vehicle.” The legislation goes on to say that this exemption does not apply to car fuel.

Until now, the guidance in the Employment Income Manual had contradicted the legislation in advising that if an employer reimburses an employee for charging their car at home this would be a taxable benefit. The cost of domestic electricity incurred charging the company car at the employee’s home is, in tax law, indistinguishable from the other running and maintenance costs (insurance, repairs etc.) and should be covered by the exemption.

As is widely recognised, electricity, for tax purposes, is not fuel. Following a campaign by the ICAEW, HMRC has now conceded that the exemption in the law does apply to home-charging company cars and vans as long as the employer ensures that the electricity reimbursed is solely used for charging the company car. The guidance in HMRC’s manual has now been updated, although if you’re a recipient of a free electric car or van its best check that your company has updated its systems.

Tax office still in a tangle on electric cars

Having looked through the updated guidance I found another attempt by HMRC to overtax those pesky environmentally conscious taxpayers. Stage 3 of the ‘Flowchart’ EIM23900, says ‘Employee charges car at home: their employer reimburses the electricity costs’ is the question: “What is the car used for?” alongside the advice “If private use only, reimbursement is taxed as earnings. If business use only or mixed-use, go to stage 3a”. This, again, contradicts the legislation, which does not distinguish between wholly private use, mixed business and private use and wholly business use for the purpose of calculating the BIK charge on company cars. Interestingly, the updated manual makes no mention of the exemption not applying for wholly private use.

Bad advice will cost HMRC millions

Whilst HMRC has changed its guidance again, it’s worth remembering that the now 20-year-old legislation has not changed by even a comma. Taxpayers who have diligently followed the guidance in the Employment Income Manual may be entitled to claim overpayment refunds, which could amount to sizeable refunds.

For example, a company director spending roughly £20 a week charging their Tesla 3 at home could claim just over a thousand pounds a year of reimbursed electricity costs. Unfortunately for those savvy taxpayers who have been ignoring the guidance and following the legislation all along, all that’s available is the (not entirely inconsequential) satisfaction of proving HMRC wrong.

Tax Accountant’s view

Once more, HMRC have got it wrong by the almost unbelievable mistake of misunderstanding tax legislation, that they wrote themselves and as a result giving inaccurate advice to taxpayers, which will end up costing them millions.