In June, we blogged about the tax advantages commercial vans have over cars as company vehicles – particularly for those business owners using their vehicles for personal as well as business journeys.
Having personal use of a company vehicle incurs benefit in kind tax, but as we highlighted, the way this is calculated makes vans more attractive than cars.
A van driver will have to pay tax and national insurance on two annual flat rates – one for vehicle usage and one for fuel. These are currently £3,490 and £666 respectively, meaning that a basic rate tax paying van driver can enjoy 12 months unlimited private personal mileage for just £830. For their company car driving counterpart though, benefit in kind tax is based on a combination of the car’s original value and its CO2 emissions – almost certainly resulting in a figure that will be considerably higher.
It’s no wonder then that modified crew-cab vehicles that can carry passengers, as well as payloads, are so popular with business owners – especially those working in the construction sector. The versatility of this type of vehicle means it can be used to transport equipment and staff to site and double up as a very tax-efficient family run around outside of work hours.
But HMRC has now moved to close this loophole. In August, the Court of Appeal ruled that for benefit in kind tax purposes, modified crew-cab vehicles are cars, not vans. The court’s ruling has enormous implications for employers who are using this kind of vehicle for private journeys.
In brief: The court case
The case revolved around drinks brand Coca Cola providing some of its employees with vehicles for both business and private use. Described by their manufacturers as vans, the models – first-and second-generation VW Transporter T5 Kombi’s and a Vauxhall Vivaro were based on panel vans but factory-modified to have an additional row of seats fitted behind the driver. A previous court had already ruled the VW Kombi’s to be cars but held that the Vauxhall Vivaro was a van because the crew seat didn’t run the full width of the vehicle. The Court of Appeal saw things differently, ruling in favour of HMRC and pronouncing that all three models are to be treated as cars for benefit in kind tax.
What are the implications?
The ruling could yet be challenged by an appeal to the Supreme Court, but as things stand, the judgement has significant consequences for business owners who use this type of vehicle.
The Coca Cola case was specifically looking at whether these vehicles met with the definition of a van for the purposes of benefit in kind taxation. However, this isn’t the only area where vans and cars are treated differently for tax purposes. Potentially, the decision that modified crew-cab vehicles are cars not vans has wider implication:
1. Capital Allowances
Assets you buy to use in your business are eligible for capital allowances – meaning you can deduct part of the value from your profits before you pay tax.
If you purchase a vehicle that’s classed as a van, it will fall into the category of ‘plant and machinery’, meaning you can claim the annual investment allowance. While cars are also eligible for capital allowances, the way they are treated differs and is more complicated. The annual investment allowance doesn’t apply, capital allowances are calculated based on the date the car was purchased and it’s CO2 emissions. Tax relief is given more slowly over much longer periods.
Given the court’s ruling that modified crew-cab vehicles are vans not cars in relation to benefit in kind tax, it seems reasonable to assume that this is also how HMRC will now consider them for the purposes of capital allowances
VAT is another area where – from the perspective of a business owner, there are advantages to a vehicle being classified as a van rather than a car.
If your business is VAT registered, you can reclaim any VAT you pay when you buy the vehicle – something you’re very unlikely to be able to do when you purchase a car.
When it comes to VAT then, it again seems likely that HMRC will consider modified crew cab vehicles to be cars. However, things may not be quite as clear cut as they are in the case of capital allowances. Under VAT legislation, the definition of a car excludes any vehicle that can carry a payload of one tonne or more. On this basis – although we would stress it still has to be confirmed – even if a vehicle is fitted with seats behind the driver, if it can carry more than one tonne – for VAT purposes at least, it may be classified as a van.
What do you need to do?
If you’re operating any vehicles like those considered by the Court of Appeal in the Coca Cola case and used by you or your staff for personal journeys, you’ll need to take the court’s decision into account when preparing P11D’s for 2020-21 onwards.
You’ll also need to review your financial records going back to when the case first began its journey through the courts. As well as looking at retrospective benefit in kind tax, you’ll have to consider if historic claims for capital allowances and VAT recovery need to be adjusted. Guidance from accountancy bodies for affected business owners is to amend and resubmit accounts, tax returns and P11D’s from August 2017 onwards.
You can, of course, opt to do nothing and wait for HMRC to contact you but doing so means you’re likely to find them much less accommodating than if you come forward now, making your representation in writing.
Finally, if you’re planning to purchase any new vehicles for your business, you need to be clear on its classification by HMRC in order you treat it correctly in your accounts
Are you running this kind of vehicle in your business? If you know this ruling affects you, you should contact your accountant for advice as soon as possible.
No one wants to find themselves on the wrong side of HMRC, but this change of status is likely to catch some business owners out, resulting in penalties and back-dated bills.