Corporation Tax Rules for EV and the Implications for Businesses

Electric vehicles (EVs) are transforming the corporate landscape in the UK, offering businesses not only a sustainable transportation option but also significant tax advantages. With the government’s push towards a greener economy, understanding the corporation tax rules surrounding EVs is crucial for businesses aiming to optimise their financial and environmental strategies.

Capital Allowances for Purchased Vehicles:

Capital allowances permit businesses to deduct a portion of the cost of assets, such as company cars, from their taxable profits over time, thereby reducing their Corporation Tax liability. The treatment varies significantly based on the vehicle’s CO2 emissions and whether it is new or used:  

• New Zero-Emission Cars (EVs): Businesses purchasing new EVs can claim a 100% First Year Allowance (FYA). This is a substantial tax relief, allowing the full cost of the vehicle to be deducted from taxable profits in the year of purchase. This incentive has been extended and is available until March/April 2026.  
• Used Electric Cars: Unlike new EVs, used electric cars do not qualify for the 100% FYA. Instead, they are eligible for writing down allowances in the main rate pool at 18% per annum on a reducing balance basis.  
• New and Used Cars with CO2 emissions of 1-50g/km (most PHEVs): These vehicles qualify for writing down allowances in the main rate pool at 18% per annum.  
• New and Used Cars with CO2 emissions over 50g/km: These fall into the special rate pool, attracting writing down allowances at 6% per annum.  

It is important to note that cars are generally not eligible for the Annual Investment Allowance (AIA). Furthermore, the government’s “full expensing” regime for companies, which allows 100% first-year relief on qualifying new main rate plant and machinery, explicitly excludes motor cars. The 100% FYA for new zero-emission cars is a distinct and specific provision beneficial to EVs.

Lease Rental Restrictions for Leased Vehicles:

When a business leases a company car, the lease payments are generally considered a deductible expense for Corporation Tax purposes. However, a restriction on the deductible amount applies based on the car’s CO2 emissions for contracts entered into from April 2021 onwards :  

• Cars with CO2 emissions of 50g/km or less (this includes all EVs and the more efficient PHEVs): 100% of the lease rental payments can be deducted from the business’s taxable profits.  
• Cars with CO2 emissions over 50g/km: Only 85% of the lease rental payments are allowable as a deductible expense. The remaining 15% of the rental cost is disallowed for tax purposes.  

This restriction applies to the finance element of the lease. If a maintenance package is included in the lease agreement and is separately itemised and charged, the full cost of this maintenance element is typically deductible, and the VAT on it may be fully reclaimable.

The structure of capital allowances and lease rental restrictions creates a clear financial impetus for businesses. Opting to purchase new zero-emission EVs allows for immediate and full tax relief on the acquisition cost via the 100% FYA. For leased vehicles, choosing EVs or efficient PHEVs with CO2 emissions at or below the 50g/km threshold ensures full deductibility of rental payments. Conversely, purchasing higher-emission vehicles (including PHEVs producing over 50g/km CO2) or used EVs results in slower tax relief through writing down allowances at either 18% or 6%. Leasing vehicles with emissions above the 50g/km threshold incurs a 15% disallowanc