Are your company vans correctly classified for tax and NIC purposes?

At this time of year, many employers will be thinking about the requirement to report company van benefits. Ensuring such vehicles are correctly classified as vans is imperative. While this may seem obvious, this is not always the case.

In this article, we explore why van classification is important.

With a company van, it is more likely that no benefit in kind (BIK) arises. If a company van is provided for business use with only insignificant amounts of private use (which can include ordinary commuting for van benefit purposes only), no taxable benefit arises. The rules are very different for a company car, where a taxable benefit is triggered if the car is available for any private use, however insignificant.

When compared to company cars, company van benefits (when they arise) generally attract lower income tax and national insurance (NIC) liabilities because van benefit values, including associated fuel, are often lower than those for company cars. The exception can be when the car is an ultra-low or zero-emission vehicle.

Mistakenly classifying vehicles as company vans when they are company cars can therefore be a costly error for an employer. They can be held responsible for the underpaid tax (potentially calculated on a grossed-up basis) and Class 1A NIC, plus HMRC penalties and interest charges, on the under-reported benefit values.

How is a van defined for benefit purposes?

Section 115 of The Income Tax (Earnings and Pensions) Act 2003 (ITEPA) defines a van as a mechanically propelled road vehicle, which is a goods vehicle, and which has a design weight not exceeding 3,500 kilos (a vehicle exceeding this weight is treated as a heavy goods vehicle). Unsurprisingly, the legislation excludes motorcycles from being a van.

The legislation defines a goods vehicle as ‘a vehicle of a construction primarily suited for the conveyance of goods or burden of any description.’

There is a focus here on the word ‘primarily’ and in HMRC’s view, ‘goods or burden’ does not include people. The term ‘construction’ means the way the vehicle has been put together, assembled or built.

When considering whether a vehicle is a van, the HMRC interpretation of the legislation and approach is to assess the vehicle at the point it was made available to the employee and consider its construction and primary purpose under Section 115 ITEPA 2003, at that time. What the vehicle is used for is irrelevant. The appearance of the vehicle and/or its apparent structure are also not determinative.

Has this HMRC approach been confirmed in case law?

Yes, it has. The Court of Appeal in the case of Coca Cola European Partners considered whether three types of vehicle provided to employees by their employer were vans or cars for BIK purposes.

The case involved three commercial vehicles including a Vauxhall Vivaro and two Volkswagen Transporter T5 Kombis. All were classified as vans by the employer however, HMRC challenged this.

In the above case, the multi-purpose vehicles carried both passengers and goods, and each vehicle had been altered by the company. The Vivaro had seats and a window fitted, and both Kombis already had removable seating as standard. However, one Kombi had further partitions added and the second Kombi had removable racking added.

The court ruled in favour of HMRC, taking the view that all the vehicles in their modified forms (when made available), were not primarily goods vehicles, but rather multi-purpose vehicles. They could not be treated as vans for this reason and were considered cars.

The decision demonstrated that for BIK purposes, the key consideration is the construction and primary suitability of a vehicle when it is made available to the employee. The primary suitability is the predominant use to which the vehicle is first and foremost suited. If the predominant suitability of the vehicle was for the conveyance of goods or burden, it should be accepted as a van. However, a multi-purpose vehicle without primary suitability, cannot be considered a van.

What does that mean for a double-cab pick-up?

Double-cab pick-ups present a challenge when looking at whether they are vans or cars for benefit purposes. This is because the vehicles might be considered multi-purpose vehicles equally suitable for carrying goods and passengers.

However, HMRC guidance says that where a double cab pick-up has a payload of 1,000kg or more, it could be accepted by HMRC as a van for benefits purposes. According to HMRC guidance, payload means gross vehicle weight (or design weight) less unoccupied kerb weight. Care needs to be taken when a hard top is added to the vehicle. This can reduce the payload below 1,000kg, which means the double-cab pick-up cannot be treated as a van.

Why is this relevant now?

A taxable BIK arises when a company vehicle is used for private use. The extent of the benefit is determined by the type of vehicle. As previously stated, a van attracts a lower level of tax and NIC compared to a car. There is a planning opportunity for an employer to provide a vehicle which qualifies as a van rather than a car. When this is appropriate to the employee and their job role, this would give savings for both the employer and employee.

Given the planning opportunities and the risks of incorrect classification of vehicles, this is an area of focus for HMRC. In the April 2023 Employer Bulletin, HMRC stated it would like to raise awareness of how vehicles should be classified for BIK purposes. This reminded employers of the Court of Appeal decision (in the case of Coca Cola European Partners), the approach to determining whether a vehicle is a car or van, and the position for multi-purpose vehicles.

This will be of particular importance to employers that may need to report company vehicles on forms P11D for the tax year ending 5 April 2023, prior to the filing date of 6 July 2023.

Should you have questions or concerns about benefit in kind reporting of a van or a car, please contact Lee Knight or Susan Ball from our employer solutions team.