Why HMRC Need to Change Their Policy on VAT and Electric Cars

HMRC have recently issued a revised policy on the VAT rules for the charging of electric vehicles. See  Electric Cars VAT Brief

HMRC Policy is that if an employee charges their vehicle at an employer’s premises, then the employer can recover the VAT incurred on the electricity, but the employee must keep a record of the private and business mileage they undertake. This is to allow the employer to either account for output VAT on the electricity they provide to their employee, or alternatively to apply an apportionment and only recover the VAT on electricity used for business.

Unfortunately, the policy is not symmetrical. If that same employee charges their car at home and uses it partly for business, then their employer cannot recover any of the VAT as the electricity bill goes to their employee and not to them.

Both of these positions are technically correct, but this does not mean it is a policy that is either fair or practical.

Fairness first. Employers can currently recover VAT on petrol purchased by employees put to mixed-use. The private use of the fuel is still taxed, either by keeping accurate mileage records so that only business fuel VAT is claimed, or more practically by applying a scale charge that effectively estimates private use.

The big difference with electric cars is that the employee can charge the car with electricity at their own home rather than having to go to a fuel station. But unless the employee generates all of their own electricity, in both cases, they will still be obtaining the fuel/power from a third party in their capacity as private individuals.  But whereas in the case of petrol, HMRC will allow the employer to recover the VAT even though technically they have not purchased the supply, they are not prepared to do this for electricity used for cars.

I accept there are compliance questions HMRC must consider, as electricity is used for more private activities than just private mileage, as is the case with petrol. HMRC would not want a situation where businesses claim VAT on electricity used by their employees for watching TV or mowing the lawn.  Electricity use is also so varied that a scale charge for private use may not be practical. But this doesn’t mean that some mechanism to allow businesses to recover VAT incurred on electricity used for business purposes cannot be devised. If it isn’t, then we have a situation where the tax system treats electric vehicles less favourably than petrol. That seems quite wrong.

Now practicality. HMRC state that an employee who charges their vehicle at an employer’s premises must keep a mileage record. This is so the employer can either work out the value of their supply of electricity to the employee for private mileage or alternatively just recover VAT on their business mileage.  But how does this work in practice?

In most cases, the employer will not know the value of the electricity their employees use for car charging unless they have a separate meter. Even then, keeping a record of electricity provided to individual employees is unlikely to be possible.  This is a big difference from the position with petrol cars and makes apportionment far more difficult.

Assume first that the employee only charges their car at their employer’s. If you know the cost of electricity per mile, then a business/private mileage record will allow their employer to either charge VAT on private mileage or only recover VAT on electricity used for business journeys.

But what if, as is rather more likely, the employee also fuels their car at home or at a roadside charging point? How does the apportionment work now? The employer doesn’t know how much electricity they provided their employee, so what exactly are the mileage records apportioning. If they decide to recover all the VAT on electricity their employee’s business mileage justifies, then they are likely to be recovering VAT on electricity they did not provide. This could well include electricity provided by the employee at home, which HMRC have said is irrecoverable. HMRC does not explain how these practical issues can be dealt with or give examples in the new guidance.

The policy is, therefore, neither fair nor practical. I accept it’s not a simple or easy question, and the wrong policy could result in widespread fraud. But the policy HMRC have announced isn’t the answer.  Worse than that, it places such an additional burden on employers that they may decide not to allow employees to charge their cars at work, which could adversely affect the take-up of these vehicles.

There are other options. Perhaps a revised scale charge or allowing employers to recover VAT on all business mileage regardless of where a car is fueled is worth considering. It is certainly a policy question where HMRC could do worse than invite a wider consultation.

If you have any questions on this or any other VAT issue get in touch.