Do electric vehicles make financial sense?

Thursday 11th June 2020

Nearly a third of all business have either added electric vehicles to their fleet already, or plan to do so in the near future. Their reasons for making the switch vary. For some, it’s all about the carbon footprint, whereas others feel that adopting electric vehicles suits their brand ethos and image. Then of course, there’s the all-important question of cost.

Whether it’s simply a justification, or a primary reason for switching, the financial case needs to stack up. In other words, before you can make a final decision on adding electric vehicles to your fleet, you first need to get a clear understanding of their true whole-life cost.

As you would expect, there will be some tax technicalities and nuances for individual businesses to consider, but let’s start with the key things you need to know.


Running Costs

Comparing the cost of fuel, servicing and repairs, makes a strong case for switching to electric.

 The average cost of diesel is around 112p per litre and, for the sake of comparison, let’s use a typical fuel efficiency rating of 43mpg. If we use a benchmark of 10,000 miles per annum, this results in a yearly fuel bill of just over £1,185. For petrol it would be around £1,352, based on 107.1p per litre and 36mpg.

How does a pure-electric car compare? Well, if we take the accepted average of 4p per mile, the bill would be reduced to just £400. That’s a massive 70% saving for petrol drivers and 66% for diesel. To put this into perspective, for every 10 drivers switching to electric, your business could save up to £10,000 per year.

That said, fuel is not the only running cost to consider. All cars and vans need servicing and the occasional repair. Again, electric vehicles come out on top because there are so few moving parts. Just think, there’s no oil to change, no sparkplugs or timing belts to replace, and no clutch or gearbox to wear out. In fact, there are hundreds of moving parts in a traditional vehicle that you won’t find in an electric one. Of course, electric vehicles do have a replaceable battery but, with an average lifespan of 10-20 years, this is unlikely to be an issue for most drivers.


Clean Air Zones

The number, scale and cost of entering Clean Air Zones (CAZ) is on the rise.

The growing number of Clean Air Zones or Ultra Low Emission Zones (ULEZ), along with established congestion charging, can add a significant cost to regular journeys.

For example, although currently suspended due to the Coronavirus pandemic, Transport for London currently charges diesel cars that fall short of the Euro 6 standard £12.50 per day when entering the Capital’s ULEZ. That’s on top of the existing £11.50 per day congestion charge. And, with the size of the ULEZ set to expand significantly from October 2021 and other major cities set to follow suit, emission related charging is becoming more common and more punitive every year.


Employee Tax

The primary focus of Benefit in Kind tax is now to encourage zero emission choices.

For many years, the government has linked Benefit in Kind (BIK) taxation with vehicle emissions. In simple terms, this means that drivers are incentivised to make greener choices. The greener the choice, the lower the tax, with pure electric vehicles receiving the biggest incentives.

In addition, April 2020 saw the introduction of new rules which mean that the level of BIK now depends on the electric-only range in miles. As a result, cars with a minimum range of 130 miles are classified as pure-electric and will therefore incur no BIK tax in 2020/21, rising to just 2% by 2022/23. Whereas plug-in hybrids, which are only capable of 30 electric-only miles or less, face a rate of 14%.

Even cars which emit just 75g/km, which until recently would have been considered a very green choice, will be subject to a 20% BIK charge by 2022/23 or, if registered after April 5 2020, this could rise to 24% if they fail to comply the new RDE2 testing regime.

To illustrate the point, a recent report by Deloitte showed that when you look at a combination of company car tax and the net cost of fuel over 4 years, a higher rate tax payer with a £30K company car can save over £4,000 per year by switching to a pure-electric vehicle.

It seems that the overall message from the government is clear. Low emissions are not enough. Zero emission driving is to be the order of the day. Read more about how you can offer your employees a ULEV vehicle and tax savings with our Salary Sacrifice scheme.


Employer Tax

Zero emissions mean zero Employer’s NIC in 2020/21 and only nominal charges for the next 2 years.

As with Benefit in Kind tax, Employers Class 1A National Insurance Contributions (NIC) are directly linked to both the P11D value of the vehicle and its CO2 emissions. As a result, providing employees with a pure-electric car is free of any NIC liability in this current tax year.

For the next two years, we will see only a nominal rise, with tax calculations using 1% of the P11D value in 2021/22 and 2% in 2022/23. With the current employer’s NIC rate sitting at 13.8%, this means that a Tesla Model 3, with a P11D value of £56,435, would incur no employer tax liability in the current tax year, less than £100 in 2020/21 and only £156 the following year.

In terms of Capital Allowances, any company choosing to purchase brand new pure-electric or ultra-low emission vehicles (less than 50 g/km) can currently benefit from the Enhanced Capital Allowance (ECA) scheme, which increases the First Year Allowance to 100% and thereby reduces their corporation tax bill. Having said this, opting to purchase rather than lease does open up other financial risks, such as depreciation, and so it can be better to allow your leasing company to make the purchase and then factor the allowance into the agreed rentals.


Grants

Vehicle grants are still available, but are dependent on electric-only ranges.

Historically, one of the sticking points to the adoption of electric vehicles has been the physical cost of the car or van. Whilst this is still true to a certain degree, as customer demand grows and more models come onto the market, the cost per unit is falling.

To further bridge the gap, the government offers a series of grants to help offset some of the difference. For cars, this equates to 35% of the purchase price, up to a maximum of £3,000. Vans (up to 3.5t) can qualify for a grant of 20%, up to a maximum of £8,000.

The grant itself is usually applied as a discount by the manufacturer and is factored into any finance agreements. However, it is worth noting that the government has gradually tightened the rules over recent years and cars must now have an electric-only range of at least 70 miles to qualify. In the case of vans, a minimum range of 10 miles is required and a maximum emission rating of 75g/km.

For home charging, there is the Electric Vehicle Homecharge Scheme (EVHS) which provides a grant of up to £350 off the cost of purchasing and installing an eligible charge point at a residential address. For businesses, the same amount is available under the Workplace Charging Scheme (WCS) for up to 40 sockets.


Vehicle Excise Duty (VED)

Pure-electric vehicles are currently exempt from Road Tax and the Premium Supplement.

As with BIK and Employers NIC, the VED system is intrinsically link to vehicle emissions. Currently, this means that all pure-electric cars are exempted from paying Road Tax and also escape the £320 Premium Supplement on vehicles worth £40,000 or more.

On the other hand, Plug-in Hybrids benefit from a discount in Year 1, typically paying between £0 and £100 (depending on their emissions) rising to £140 from year 2. As you would expect, the cost of VED for petrol and diesel vehicles scales up rapidly in line with their emissions in Year 1, before levelling out at £150 per year from Year 2 onwards.


Insurance

Premiums are still slightly higher, but it’s a clear downward trend.

Whilst early adopters of electric vehicles were subject to higher insurance premiums, rising customer demand and increased claims experience is reducing the average cost of cover.

The number of garages capable of carrying out EV repairs is also increasing, resulting in more competition for work. And as the level of claims data improves, there is a growing realization that fewer moving parts can often mean cheaper repairs, so there may be further cost reductions in the years ahead.

Put simply, although electric vehicle operators can still expect to pay slightly more for their cover at this point, increased competition from insurers should mean that future premiums will soon come into line with their petrol or diesel counterparts.


The Final Equation

Focusing on the whole life cost of motoring will show when the time is right to switch.

On the face of it, electric vehicles can seem more expensive than comparable ICE models. Recent years have seen manufacturers investing heavily in the development of their EV offering and they don’t yet have the economies of scale that would allow for a significant reduction in headline pricing. However, the gap is closer sharply and, with 1 million electric vehicles forecast to hit UK roads by 2025, economies of scale and increased competition will continue to reduce headline prices.

Having said this, deciding when to make the switch to electric vehicles requires you to look beyond these headline rates or tax implications and focus on the total cost of motoring. This includes fuel, servicing, the cost of entering emission-controlled areas and any available grants. Doing so may take a little more time and effort, but the results will help you decide when it makes sense for you to make the switch.

In fairness, the decision to adopt electric vehicles into your fleet must also include an analysis of the operational practicalities involved and the impact on driver efficiency. With this in mind, we will be looking at the practical case for electric vehicles in the second of our series. (link to post once live)

In the meantime, if this has made you look at electric vehicles in a new light, or if you need a little help to crunch the numbers for your business, our expert team are always on hand to walk you through the details.