VAT and fuel costs on electric cars

If you’re looking to buy a new car, then you’ve probably also been looking at the option of purchasing a fully electric car. However, don’t get caught out by the common misconception that you will be able to claim back VAT in full on your purchase.

VAT

You’d be forgiven for thinking that there is some sort of ‘environmental’ incentive allowing you to reclaim the input VAT on purchasing an electric car. This is the understanding of many, but unfortunately it’s wrong. There is no difference between buying an electric, hybrid or traditional fuel car when it comes to VAT. Likewise, this is also the case regardless of how the car has been bought i.e. outright, hire purchase etc. 

The general rule applies that input VAT is not recoverable on purchases of cars, with specific exemptions to the rule as listed in HMRC guidance. Importantly, unless you’re buying a car exclusively for business use, and there is no private element, you will not be able to recover VAT.

Fuel costs - complications

HMRC has recently updated its advisory fuel rates, setting a rate for fully electric cars at 4 pence per mile. This rate is to be used where VAT is recoverable on the fuel element of a mileage allowance paid to an employee.

The difficulty comes in calculating the correct amount of VAT to extract, as this will be dependent on the location at which the car is charged. If charged at business premises, a VAT fraction of 1/6 (20%) would be used for commercial use. However, if the car is charged at home, then a fraction of 1/21 (5%) for domestic use would be used. Additional complications arise if the car is charged at multiple locations e.g. a mix of business and home, or even at a third party such as a petrol station with electric charging points.

Further to this, there may be duplication of reclaiming VAT if the business is charging the car at work, and recovering VAT on business premises electricity bills.

There is currently no guidance from HMRC on this issue, so for now this is a bit of a grey area. HMRC have at least clarified that hybrid cars are treated as either petrol or diesel cars for this purpose.

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