Can you reimburse electric car mileage above the advisory rate?
When your employees travel for work you have to reimburse them for their mileage but this is complicated when it comes to electric cars. HMRC has a standard rate, known as the Advisory Electricity Rate (AER), of 8p per mile for electric company cars. But, due to recent energy price rises, many companies find this doesn’t reflect the cost of charging electric vehicles (EV) in the real world and their employees could be losing out. But can you reimburse them above the AER and what does this mean for the tax liability of both employer and employee?
The rate is unrealistic
Units of electricity are measured in kilowatt-hours (kWh) and each charging network sets a different rate per kWh, like varying petrol prices at different forecourts. While the average cost of ‘filling up’ a battery is 24p per kWh, some charging points can charge up to 65p per kWh. The average distance an EV can travel on one kWh is 2-4 miles but, as charging rates are so variable, sometimes an employee may not be reimbursed accurately for their actual costs.
For example, if an employee travels 100 miles for work at the average cost of 24p/kWh at 3 miles/kWh, they will be reimbursed £8 at the 8p AER (100 x 0.24 ÷ 3). However, if their charging costs them 65p/kWh, for same distance, the actual cost of the journey is £21.67 (100 x 0.65 ÷ 3), leaving them £13.67 out of pocket.
A complicated situation
Paying above the advisory rate has been a bone of contention for years and is further complicated by different interpretations of the rules. Current legislation states, “Electricity does not sit within the meaning of fuel so the Fuel Benefit Charge does not apply”, meaning it is not classed as a fuel and therefore not taxable, if reimbursed. HMRC guidance says that there is a tax and NIC liability where an employer reimburses their employee for the cost of charging a company-owned, wholly electric car that is available for private use. The Institute of Chartered Accountants in England and Wales is currently in discussion with HMRC to clarify this but we may not know the outcome case for some time. For the time being at least, keeping detailed records of company vehicle usage is key.
What records you need to keep
You can reimburse above the AER but there’s a risk HMRC may decide the additional amount should be taxed as income for the employee. To minimise this risk in the event of an investigation, we strongly advise you to keep the following records for at least six years, to substantiate why you are paying above the AER to each employee:
- Business miles per trip
- Start and end point for each trip
- The names and businesses of the people visited
- Number of kWs charged at home, on the motorway, or other charging point
- Average number of miles per kWh the EV does. This will vary, depending several factors, so needs to be calculated accurately.
- Photos of meter readings and charging point receipts
We also recommend an independent review and sign-off of all mileage claims. In other words, if you are a director, don’t sign off your own expense claims.
What else could you do?
You, as employer, could pay for a charging point to be fitted at an employee’s home, without it being a taxable benefit in kind. There are grants available to partially fund the installation cost, such as the Government’s EV Chargepoint Grant, which provides funding of up to 75% towards the cost of installing electric vehicle smart chargepoints at domestic properties across the UK. Visit https://www.gov.uk/government/collections/government-grants-for-low-emission-vehicles for more information. The downside of this option is that you would be paying for an employee’s private mileage (unless you ask for reimbursement from them, which would require even more record-keeping). If you provide charging facilities at work, this wouldn’t be a taxable benefit for the employee, but the rules and conditions can be complex.
If installing a charging point isn’t feasible, you could pay for a fuel charge card of up to £100 per year for each employee, which would not be a taxable benefit. Although this is unlikely to recover the total discrepancy in cost between the AER and real world charging rates, something is better than nothing.
Alternatively, you could set up a separate contract directly with your electricity provider just for charging point electricity, then the cost of this power would not be a taxable benefit on the employee. IMPORTANT: This would not work if the contract is in the name the employee, even if they provide a copy of their bill for reimbursement. Although these are the options currently available, they are liable to change, depending on the outcome of the court case and future government initiatives and legislation on electric vehicles. With the Spring Statement on 15th March, it is worth keeping yourself informed. If you need to find out how mileage reimbursement could affect your business, get in touch with us for straightforward advice to empower you to make the best decision for your company.
