Out-Law News 2 min. read

HMRC reviews VAT recovery on electric vehicle charging

HM Revenue & Customs (HMRC) is reviewing its policy on the reclaim of UK input VAT on the cost of charging electric vehicles (EVs), particularly where employees are reimbursed for the cost of electricity used in charging an EV for business purposes.

HMRC has announced that it is considering the situation where an employee is reimbursed by the employer for the actual cost of electricity used in charging an EV for business purposes to determine what evidence can be provided, to allow the employer to claim back the VAT. It is also considering other simplification measures that may reduce administrative burdens in terms of accounting for VAT on private use.

The review is being conducted after HMRC received a number of representations from businesses and business representatives about the limited options for reclaiming VAT on the cost of charging EVs set out in guidance it issued in May 2021.

The May 2021 guidance said that an employer cannot recover VAT where it reimburses an employee for the cost of charging at home an EV used for business. This is on the basis that the supply of the electricity is made to the employee and not to the business.

The guidance also stated that if an employee charges an employer’s EV at the employer’s premises for both business and private use, the employer can recover the full amount of VAT for the supply of electricity used to charge the EV. However, it stated that the employee would need to keep a record of their business and private mileage and the employer would be liable for an output tax charge on the amount for private use. Alternatively, the guidance said that the employer could recover VAT on only the business element.

“Given that the government is trying to encourage the uptake of EVs, it was surprising that HMRC’s initial position on VAT recovery on charging an EV was less favourable than for fuel for a diesel or petrol car,” said Stuart Walsh, a VAT expert at Pinsent Masons. “It is good news for businesses that HMRC is reconsidering its approach.”.

An employer that reimburses employees for petrol or diesel used for business purposes can treat the VAT paid by the employee as its input tax, provided the employer reimburses the employee for their actual expenditure on the road fuel.

The May 2021 guidance also said that supplies of EV charging through charging points in public places should be charged at the standard 20% rate of VAT. HMRC said that the ‘de minimis’ reduced 5% VAT rate for supplies of small quantities of electricity does not apply.

The de minimis provision only applies if the supply of electricity is ongoing, to a person’s house or building and is less than 1,000 kilowatt hours a month. The guidance says the de minimis does not apply to supplies of EV charging at charging points in public places because these supplies are not made to a person’s house or building. In addition, the guidance says these supplies are not usually an ongoing supply to one person where the rate of supply can be calculated.

The sole proprietor of a business can recover VAT to the extent that they charge their EV at home for business purposes. They can also recover VAT where they charge their vehicle for business use at other places, although the rate of VAT will depend upon where the vehicle is charged.

“This seems to be another example of HMRC rushing out guidance without having fully considered the implications. We are still waiting for final guidance on the VAT treatment of compensation payments, after HMRC said almost a year ago that it was re-thinking its sudden change in policy,” Walsh said. 

On 2 September 2020, HMRC made a surprise announcement that it was changing its published guidance on the VAT treatment of both early termination payments and other compensation payments relating to commercial contracts with retrospective effect. The guidance did not explain how property transactions would be affected, especially dilapidation payments under leases.

In January 2021 HMRC said that it would issue revised guidance “shortly” and confirmed that the change would not apply retrospectively. The revised guidance has still not been published.

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