The purchase of a vehicle in your business is always significant decision with many factors involved.  This becomes even more complicated when the differentiation between a car and a van becomes difficult to establish.  HMRC have challenged many high profile cases, not least in the widely reported Coca Cola case where it was found that the adapted vehicles were in fact classed as cars rather than vans.

HMRC allow for the incidental private use of commercial vehicles without the need for completion of a form P11d and the subsequent tax charge on the employee, also known as a benefit in kind (BIK).

HMRC’s guidance states that:

You will not need to report your van if it’s all of the following:

• available for use and used by more than 1 employee
• available to each employee because they need it to do their job
• not ordinarily used by 1 employee to the exclusion of others
• not normally kept at or near employees’ homes
• used only for business journeys – limited private use is allowed, but only if it’s incidental to a business journey, for example driving home to allow an early start the next morning

Where there is more than incidental private use a BIK charge arises for the employee. In the current tax year this amounts to a charge of £3,960 (2022/23 £3,600) for the vehicle and an additional £757 (2022/23 £688) if the employee is provided with private fuel.  A basic rate taxpayer would suffer an income tax charge by virtue of the personal allowance being reduced of £943.40 (2022/23 £857.60) per annum. If the van has zero emissions the tax charge is reduced to nil.

Unlike the benefit in kind on commercials vehicles which is at a fixed rate, car BIK rates are based on the list price and emissions of the vehicle and can result in a substantial BIK charge on the employee if the CO2 emissions are high.  Where fuel is also provided for private use, this can become a very expensive option.

Along with the income tax implications for the employee, it should also be noted that the Employer has a Class 1A National Insurance liability payable annually of 13.8% of the BIK amount.  On that basis, determining whether a vehicle is a commercial vehicle is even more important.

With regards to VAT, the recovery of the input tax charged (VAT) would normally be allowed on a commercial vehicle, hence reducing the amount of VAT owed to HMRC.  In contrast, the recovery of input tax charged (VAT) on a car is normally precluded.

There is also a different tax treatment on the purchase of commercial vehicles from a capital allowances point of view.  Typically, a commercial vehicle will qualify for a 100% deduction against profits in the year of purchase, subject to a private use adjustment for sole traders and partnerships.  Conversely, full relief against profits for the purchase price of a vehicle that is deemed a car may take many years with relief potentially being as low as 6% per year on a reducing balance.

Is it a car or van?

As outlined above, the tax effect of whether a vehicle is classed as a car or a van is significant, especially with company car BIK rates steadily rising over the last few years.  As a result of the significant differences between the tax implications of a commercial vehicle compared with those of a car, pick-up trucks, in particular double cab pick-ups, have become an increasingly popular choice.

While HMRC accept that a pick-up with only one row of seats will qualify as a commercial vehicle, the classification of double cab pick-ups is less clear cut.

HMRC will normally class a double cab as a commercial vehicle if it has a payload of 1 Tonne or more.  Most double cabs do have a payload capacity of just more than that, but once a hardtop has been purchased and fitted, this can take the capacity below this limit – turning the BIK from a commercial vehicle into a car. Under an agreement between HMRC and the Society of Motor Manufacturers and Traders, it has been agreed that a hard top consisting of metal, fibre glass, or similar material, with or without windows, is accorded a generic weight of 45kg.  Therefore if a double cab with a payload anywhere between 1,000-1,044kg is fitted with a hardtop, the payload will be reduced below 1 Tonne thereby converting what was a commercial vehicle into a car for tax purposes.

This can be a very expensive mistake in terms of not only a higher BIK charge for the employee, but also an increased Class 1A National Insurance liability, a potential restriction in when relief for the cost of the vehicle is available, and a restriction on VAT recovery (see later) for the Employer.  The 1 tonne rule only applies to double cabs and not any other vehicle.

HMRC’s internal manuals refer specifically to double cab vehicles. Its definition being:

A vehicle of this sort normally has:

• a front passenger cab that contains a second row of seats and is capable of seating about 4 passengers, plus the driver
• four doors capable of being opened independently, whether the rear doors are hinged at the front or the rear (two door versions are normally accepted to be vans) and
• an uncovered pick-up area behind the passenger cab.

A commercial vehicle is defined as a vehicle ‘designed primarily for carrying goods or burden’.

HMRC may also look at the type of trade carried on in the business to assess whether there is a need for a commercial vehicle to carry goods.  For example, it is more likely to be accepted as needed in the trade of a builder or farmer rather than a salesman that does not need a commercial vehicle to carry samples etc.

It is incredibly important to seek advice before buying any type of vehicle which may have some private use before purchase as a mistake can make a huge tax difference.  It is worth noting that the VAT recovery in almost all circumstances on a car is blocked from recovery.

VAT as previously mentioned on a commercial vehicle is generally accepted as recoverable if the private use of the vehicle is ‘incidental to the main use of the vehicle’.  However, VAT on a double cab pickup is not necessarily recoverable in full if there is more than incidental private usage.  If this is the case, we suggest you contact us for advice.

Please contact you normal Wheelers contact for more information.

Article written by Helen Garrett