Electric cars – the financials: EV leasing, finance and taxation

Electric cars – taxation environment

Electric cars are treated much more favourably in terms of taxation than petrols and diesels – but not nearly as favourably as when they first appeared. Implications of EV leasing, finance and taxation need to be scrutinised for maximum benefit.

It is predicted that they will be more heavily taxed in future as governments try to make up the revenues that will be lost as dirtier vehicles are retired.

The glorious days of free road tax and very low company car tax are fast becoming just a memory for low and zero emission cars, with the watershed that came in the 2015 Budget announcement of the 2017 changes in Vehicle Excise Duty.

That brought in penal banding for CO2 levels for first-year rates and changed standard rate VED from £0 to £140p.a. for everything except pure electrics with just £10 discount for alternatively fuelled vehicles such as hybrids.

But alongside the slow change to incentivise low emissions (with only the first year VED penalties), the past few months has seen the raised leverage away from diesels, with the BIK diesel surcharge rising from 3% to 4% in April 2018 and a one-band rise in new diesels first year road tax, increasing the levy by up to £500.

Fuel taxation

Domestic electricity from the mains attracts VAT at 5 per cent – a far lower of taxation than for petrol and diesel where VAT and other taxes account for over well over half of the pump price.

One thing for company car users to watch out for is that HMRC rules say that “advisory fuel rates [AFRs] are based on the average price of fuel per mile – electricity is not a fuel.” And because electricity isn’t classified as a fuel, it isn’t possible for company car drivers to charge for business mileage.

By contrast, a business driver who owns a car privately can expense the running costs through the company via the AMAP (Approved Mileage Allowance Payment) rates, which would be 45p per mile tax free for the first 10,000 miles of business mileage, and 25p per mile thereafter.

Company car taxation

Electric cars are treated favourably compared with petrols and diesels when it comes to company car taxation, most notably via a much lower benefit in kind (BIK) rate than other types of cars – including hybrids and plug-in hybrids.

But company car tax for pure electric cars nearly doubles from the current (2017-18) 9% band to 16% for 2019-20 before finally dropping to 2% in 2020-21. Back in 2014 it was 0%, then 5% 2015-16, 7% 2016-17. The 2020-21 bandings also relate the zero-emission driving range of hybrids to the BIK bandings.

The tax pain has been drawn out by a Government promise to give business car tax figures three years in advance. But that does give an incentive to those taking out a new lease on zero/low emission cars in 2018-19 that their tax bill will drop in the last year.

One thing to look out for – P11D values are based on the price of an electric car before the plug-in car grant is applied. Another wrinkle is that the P11D value of Renault and Nissan cars with separately leased batteries also includes an additional amount of several thousand pounds to reflect the insurance value of the battery.

VED concessions

Zero-emission pure electric vehicles are exempt from Vehicle Excise Duty (VED), a concession that survived a  big revision to the VED rules in 2017, which removed the exemption from most hybrids and low-CO2 petrols and diesels.

Under the current rules, that gives a pure electric car an annual cost advantage of £140 a year over most other cars and £130 compared with hybrids.

One exception is that more expensive electric cars with a list price over £40,000 attract an annual “premium” VED fee of £310 per year for five years that applies to all cars in that price bracket regardless of which fuel they use.

Congestion Charge concession etc.

Electric cars also enjoy certain other exemptions. Zero emissions and low emissions vehicles CAN enjoy the Ultra Low Emission Discount (ULED) which means that they don’t attract the London Congestion Charge (LCC).

That could mean a saving of a couple of thousand pounds a year for electric car drivers who regularly commute into central London.

But it has to be applied for annually, with a £10 annual fee.

Electric cars – government support

Official policy in the UK, in common with most countries, is quite strongly in favour of electric cars. This is backed up by a target to end sales of conventional petrols and diesels by 2040 and a variety of fiscal incentives as well.

Some of the financial support provided by the government for electric cars has been tightened up over the years.

Company car taxation was extended to electric cars in 2015, albeit at a lower rate than for petrols and diesels and the plug-in car grant on new electric car purchases was reduced as well, but there were bigger cuts to the grants for plug-in hybrids.

The subsidies for the installation of home electric car charging points have also been reduced although they are still comparatively generous. On the other hand the VED exemption for electric cars survived a recent tightening of the system that brought previously exempt low-CO2 diesels and hybrids into the net.

Buyers whose decision to buy an electric car rests heavily on their calculation of the fiscal advantages will naturally want to know how stable the current arrangements are likely to be during their period of ownership.

There are no guarantees – for example government policy has turned sharply against both bio-fuels and diesels in the past – but there do not currently seem to be any major changes of direction in prospect for electrics.

Grants for plug-in cars

New pure electric vehicles attract a plug-in car grant of £4,500, which applies to all cars with CO2 emissions of less than 50g/km that can achieve a 70-mile range. This is a small reduction compared with the £5,000 that applied before a revamp of the rules in 2017, which also shrank the grant applied to hybrids from £5,000 to £2,500.

Similar government grants are available for the purchase of new low-emission motorcycles and vans.

The most expensive electric cars – those with an on-the-road price of £60,000 – do not benefit from from the plug-in car grant.

Subsidies for home charging points

The government’s Electric Vehicle Homecharge Scheme (EVHS) provides a 75 per cent contribution to the cost of installing a home charging point, up to a cap of £500 including VAT. Only drivers of electric cars are eligible.

These provisions are less generous than previous versions of the scheme, which covered the entire cost of installation, but still bring the cost of a professionally installed home charger to a few hundred pounds.

Depreciation and electric cars

Although it’s still very early days, the first electric cars seem to be heavy depreciators – and that includes the most popular and attractive models such as the Nissan Leaf and Renault Zoe.

It’s probably too soon to tell whether this will be a permanent feature of the market or whether it is a temporary initial hiccup caused by risk-averse second-hand car buyers being less willing to take a punt on unfamiliar technology than the well-heeled early adopters who buy the cars new with maximum tax benefits.

It’s also possible that supply will tighten up again and help residuals as electric takes off.

In the meantime, although this is likely to be less relevant to business car buyers, cheap but still young used EVs do offer a less risky way of getting experience of electric than buying new.

It’s worth bearing in mind that any cars that qualify for the plug in car grant must also have a five-year warranty on the drivetrain and battery, or the manufacturer must produce extra evidence that the battery will still be performing reasonably after three years, which should logically underpin residual values during the early years of an electric car’s life.

Obsolescence and technical change

Electric cars are improving rapidly, especially in terms of battery capacity, so if you buy one now, there’s a good chance that within a short timeframe it could be put in the shade by later models offering better range.

However the converse applies to Tesla models that have online software updates for all aspects of operation and can be upgraded to have more power online, maintaining residuals

Electric car pricing – how does it compare?

While electric cars are in most respects cheaper to run and own than petrols or diesels, they can still be quite a bit more expensive to buy or to lease in the first place.

That said, the size of the price premium can be quite difficult to establish – for example, cars such as the Renault Zoe, Nissan Leaf and BMW i3 are only available in electric form so there is no direct petrol or diesel equivalent.

Volkswagen’s eGolf costs about £9,000 more than the cheapest Golf SE, which has similar equipment levels – and that’s after allowing for the plug-in car grant on the eGolf.

On the other hand, it’s roughly in the same price bracket as the Golf GTI and GTD high performance Golfs, as well as the plug-in hybrid GTE, so even where electric versions of mainstream cars are available the price premium can be hard to assess. [can you give some lease examples please – try nationwide vehicle contracts, they have a very good website] [Nationwide didn’t actually seem to have any lease rates for eGolf! I instead found ukcarline.co.uk – hope that’s an appropriately reputable source – the numbers I’ve given are all for 30,000 miles, 36 months with 12 months rental up front.]

An electric Golf can be quite a bit more expensive on a business lease basis than a standard petrol or diesel model as well. A leading provider was recently offering the Volkswagen eGolf on a business lease (customer maintenance) for £311.83 plus VAT per month (36 months, 30,000 miles, initial rental 12 months = £3,742.02 plus VAT).

By contrast, on the same basis, the similarly equipped petrol Golf 1.5 Tsi Nav SE with a DSG gearbox was being offered for just £198.65 plus VAT per month with an initial rental of £2,383.82 plus VAT.

And the eGolf is even quite a bit more expensive than many of the high-performance Golfs as well. A 230PS Golf GTI with DSG was going for £247.57/£2,970.80, a high-performance Golf GTD diesel with DSG was £249.39/£2,992.63 and the plug-in hybrid GTE model was £245.13/£2,941.59 (all rates are for five-door cars).

At the high end, Tesla’s Model S, while pricey by most standards, doesn’t look particularly expensive compared with, say, the Porsche Panamera.

Running costs

Lower fuel costs, especially from the domestic electricity supply, are one of the biggest selling points for electric cars.

• Cost of charging at home v cost of public charging

A commonly used rule of thumb is that electricity from the domestic mains costs about 2p per mile in an electric car, and this figure has also featured in Nissan’s advertising for the Leaf.

Costs can vary quite a bit when using public charging infrastructure. Some public charging points are free. Tesla’s Supercharger network was also free for buyers of the company’s Model S and Model X but this benefit isn’t being extended to owners of the forthcoming Model 3.

Ecotricity’s rapid chargers, which are found mainly on motorways, cost £3 per charging session (of up to 45 minutes) and 17p per kWh (for reference, the battery capacity of a Nissan Leaf is either 24 kWh or 30 kW).

• Cost per mile electric v cost per mile petrol/diesel

An electric car is much cheaper to run in terms of fuel than a petrol or a diesel. Broadly speaking, an electric car is reckoned to cost about 2p per mile to run in electricity from the domestic mains compared with at least 10p per mile for a petrol or a diesel. It may cost more to charge from a public charging point, though.

In practice, of course, that 2p per mile can vary according to the domestic electricity tariff an EV owner uses, and also how the car is driven – just as the cost per mile with a diesel or a petrol can vary according to the price paid at the pump and road conditions. But in any case, the savings are large.

• Servicing

Electric cars, at least as far as the powertrain is concerned, are inherently far simpler than petrols and diesels, with far fewer moving parts. That means the servicing burden is far lighter and servicing costs lower. Replacement items such as engine coolant, oil, spark plugs, diesel injectors and exhaust systems simply have no equivalent on a pure electric vehicle.

But an electric car is best seen as a low-maintenance rather than a no-maintenance machine. The braking system, for example, still needs to be maintained, and fluid checked, even though the road brakes get far less wear on an electric car than they do on a petrol or a diesel, thanks to the regenerative braking retardation offered by the electric powertrain.

• Maintenance

The maintenance burden for an electric car between services is very light as well. There are no oil or coolant levels to keep an eye on.

On the other hand, like any other car, an electric car still needs to be able to pass the MoT from its third birthday onwards, so it’s important to keep up the usual safety checks and tasks such as topping up the windscreen washer fluid and monitoring tyre condition and pressures.

Renault/Nissan battery lease 

Renault has from the start offered a different method of buying and financing the purchase of an electric car – the battery lease. Under this system of battery hire, the owner buys the car but rents the traction battery, which accounts for a large proportion of the value of the combined package, in return for a monthly fee.

Renault previously sold all of its electric cars on a battery rental basis but later gave Zoe buyers the option of buying the car and the battery together outright. Conversely, Renault’s alliance partner Nissan, which initially sold all Leafs on a “batteries included” basis, later started offering a Renault-style battery lease option as well.

• How it works

The initial price of the car is lower by several thousand pounds but the owner has to come up with a monthly battery lease payment that covers the use of the traction battery.

Buyers can choose between a range of options depending on the mileage they expect to cover and the duration of the agreement, and these attract different monthly rates. If the car is sold, the lease obligation ends once a new buyer takes over the agreement.

• What it includes

The terms “battery lease” and “battery hire” are, perhaps, slightly misleading in the sense that the lease package includes other elements as well – most notably a full roadside recovery service. The performance of the battery is also guaranteed – if it falls below 75 per cent of the original capacity, Renault will swap it out or fix it.

• The pros and cons

One advantage of the battery lease is that it greatly reduces the up-front cost of buying an electric car, which, during the initial phase of the market’s development, has been off-puttingly high.

In fact, with a lower list price but continuing monthly payments for the battery lease, the cost profile of a Renault with a battery lease is quite similar to that of a petrol or a diesel.

The normal pattern for an electric car is different – a high initial price offset by very low fuel and maintenance costs.

There doesn’t seem to be any particular fiscal advantage to the battery lease – for example the insurance value of the battery is included in the car’s price for P11D purposes – and it is, of course a source of additional complication.

It may well be that as battery prices continue to fall, and confidence in the reliability of batteries grows, the arguments against outright ownership of the battery pack as an integral part of the car will recede.