Cars vs Vans – The tax implications of company vehicles

18/03/2024

Providing a vehicle to your employees can be a real incentive and often essential to their role. However, the type of vehicle you choose could have a significant impact on the tax that you and your employees pay.

This distinction, which at first glance appears to be clear-cut, demands meticulous examination. Only recently, HM Revenue & Customs altered its tax treatment of double-cab pick-ups to reclassify them as cars.

HMRC classifies a double-cab pick-up as follows:

• a front passenger cab that contains a second row of seats and is capable of seating about four 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 pickup area behind the passenger cab.

This decision was subsequently reversed following a strong public outcry. However, there is a precedent for ambiguity within the tax rules as evidenced by a landmark tribunal case involving the multinational beverage corporation, Coca-Cola.

The Court of Appeal (CA) decisively adjudicated that three similarly modified multipurpose vehicles (crew-cabs – where there is a row of seats between the front cab and load space), which Coca-Cola had allocated to their employees under the presumption of them being vans, were, in fact, legally considered cars for tax purposes.

With these recent matters in mind, let’s carefully examine the key differences.

Delineating the difference between cars and vans

The legal framework defines a car not based on its type, but rather what it is not. HMRC’s website states that a car is a mechanically propelled vehicle other than:

• A motorcycle
• A vehicle of a construction primarily suited for the conveyance of goods or burden of any description, or
• A vehicle of a type which is not commonly used as a private vehicle and is not suitable for use as a private vehicle.

In comparison, vans are more clearly classified as a vehicle principally engineered for the transportation of goods, with a full load capacity not exceeding 3,500kg.

Nonetheless, ambiguities between these two classifications emerge, particularly with multipurpose vehicles that feature additional passenger seating but retain a load space.

Tax treatment of cars vs vans

The tax treatment allocated to vans presents a more favourable scenario for both employers and employees. They offer several key financial benefits:

• VAT implications:
  The capability to reclaim input VAT on the acquisition of commercial vehicles stands in stark contrast to cars, where VAT cannot be claimed unless the car is used exclusively for business purposes or it is a pool car that is available for use by all employees.
• Benefit in kind (BIK) charges:
  The tax system treats cars and vans differently, with cars subjected to variable tax rates predicated on CO2 emissions, whereas vans enjoy a uniform BIK charge.

  For 2024/25, the taxable amount for vans remains frozen at £3,960. This means basic rate taxpayers pay £792 annually, while higher rate taxpayers will face a £1,584 charge for the use of their company van in 2024/25. The van benefit charge does not apply to electric vans.

  If a van charge applies and the employer decides to cover private travel fuel costs as well, a separate van fuel charge of £757 for 2024/25 will apply. This ‘free fuel’ benefit will incur a tax of £151.40 for basic rate taxpayers and £302.80 for higher rate taxpayers in 2024/25.

  Crucially, vans designated solely for work-related use are exempt from BIK taxation, assuming private use is minimal and incidental.

How do company cars compare for BIK?

If your employee has a company car which they use for private use, they will have to pay a BIK contribution.

The BIK payment rate is calculated based on the P11D value of the vehicle, its CO2 emissions, and the employee’s income tax band.

For example, a new BMW 3 Series Saloon 320d (M Sport Sport-Auto) has a P11D value of £44,185 and a CO2 rate of 30 per cent.

This means its BIK value is £13,256 (£44,185 multiplied by 30 per cent), which for a basic rate taxpayer means a total payment of £2,651 per annum. (BIK value multiplied by the 20 per cent income tax band)

The bands for the current tax year and next, based on CO2 are outlined below:

Most dealerships will be able to provide the P11D value for your vehicle or various online resources can also give you this figure.

Be aware, that a four per cent surcharge applies to diesel vehicles not meeting the RDE2 standard.

Your employee will pay BIK tax on the car, but your business will pay employer National Insurance on the car’s BIK value as well – this is currently set at 13.8 per cent.

The pivotal HMRC v Coca-Cola tribunal decision

The HMRC v Coca-Cola case brought to light the complexities inherent in classifying vehicles as cars or vans.

The tax tribunal’s determination that two Volkswagen Transporter Kombi models and one Vauxhall Vivaro were cars was based on the vehicles’ dual functionality for both passenger and goods transport, thus not meeting the stringent criteria for vans.

This judgment emphasises the importance of assessing a vehicle’s configuration during its purchase or after any modifications are made when ascertaining its tax classification.

HMRC’s guidance now makes it clear that a vehicle’s primary design for goods conveyance is paramount, with modifications such as the addition of side windows and extra seating potentially disqualifying it from being considered a van.

Strategic considerations for employers

For employers who provide multi-purpose company vehicles for their employees’ private use, these nuanced tax considerations warrant careful deliberation.

The Coca-Cola tribunal outcome, along with HMRC’s refined guidance, necessitates a thorough review of vehicle classifications for P11D reporting purposes and could impact future decisions regarding company vehicle purchases.

HMRC has endeavoured to clarify the distinction between cars and vans for BIK taxation, updating its employment income manuals and highlighting the need for employers to judiciously ascertain a vehicle’s primary use.

Despite these clarifications, the unique characteristics of each vehicle may still pose classification challenges.

Get advice

Employers are advised to proceed with caution in the classification of company vehicles given the intricate tax implications and potential liabilities involved for themselves and their employees.

Given the evolving nature of vehicle use and classification, engaging with an employment tax specialist can offer clarity and ensure adherence to the latest compliance standards and rulings.

Our dedicated team of experts stands ready to assist you in navigating the complexities of tax compliance for company vehicles, so please get in touch.