Last reviewed 20 February 2018
It is important for a business to decide if a vehicle is a van or car. This has implications for the business (National Insurance contributions (NICs) and VAT input tax claims) and the employee (amount of tax applied on the benefit of using the vehicle). Usually, just looking at the vehicle will determine if a vehicle is a van or a car. There can, however, be difficulties with vehicles such as vans with a second row of seating and various land rover defender type vehicles. This issue “taxes” the minds of even the largest businesses. For example, Coca Cola has recently had an appeal heard by the First Tier Tax Tribunal on this issue. John Davison investigates.
A business can reclaim the VAT back on a car if it is stock in trade for a car dealer, purchased for use as a taxi, self-drive hire or use in a driving school. VAT can also be reclaimed on cars bought wholly for use in the business, but if the car is available (even if not used) for private use, the VAT is not claimable. Where the car is leased, 50% of the VAT can be reclaimed. Generally, all the VAT on car maintenance is deductible on business vehicles. If VAT is claimed on fuel costs and there is any private use a fuel scale charge is applied and VAT is due to HM Revenue & Customs (HMRC). VAT is reclaimable in full on vans and motorbikes, but there may be a restriction on the VAT incurred if there is any private use.
For VAT purposes a car is defined as:
a vehicle constructed or adapted for carrying passengers
having a roofed area to the rear of the driver and rear side windows.
A car does not include vehicles that are:
capable of carrying only one person
capable of carrying 12 or more seated persons and meet the requirements of the regulations
not less than three tonnes unladen weight as defined in the regulations
constructed to carry a payload of more than one tonne, as defined by the regulations
caravans, ambulances and prison vans
vehicles designed for a special purpose other than carrying passengers.
The regulations referred to are the Road Vehicle (Construction and Use) Regulations 1986.
This is only a brief outline of the VAT rules and there are a few more complications that may need to be considered (such as conversions, second-hand vehicles, disposal of vehicles, payment of mileage allowances and exported vehicles).
Defining a vehicle as a car or goods vehicle/van is important for income tax purposes as it will impact the amount of NI that the employer has to pay on benefits provided and also the tax charged to employees for the benefit of using the vehicle as part of their employment income or benefits. The statutory provisions for direct tax are less well defined (and the Tax Tribunal did refer to VAT Tribunal decisions to assist them). Section 115 of the Income Tax (Earnings and Pensions) Act 2003 provides that a car is a road vehicle that is not a goods vehicle, a motorbike or a vehicle not commonly used as a private vehicle. A van is defined as a road vehicle that is a goods vehicle with a design weight of under 2500 kilogrammes.
There is little to aid a business in understanding if a vehicle is actually a van or not. HMRC’s guidance is:
the test is applied at construction
a vehicle designed and marketed as a multi-purpose vehicle is unlikely to be a van
a vehicle with side windows behind the driver and passenger doors is unlikely to be a van particularly if fitted or capable of being fitted with additional seating behind the driver’s seat whether or not fitted to the vehicle at the time.
The difficulty is highlighted by the recent Coca Cola case. The tribunal decided that a Vivaro with rear seats fitted (two seats, which left space on the left of the seat for goods) was a goods vehicle/van, but a VW Kombi van that had a rear bench seat was not a van but a car. There was little to differentiate the two vehicles in terms of passenger carrying and goods carrying. Perhaps the deciding factor was that the Vivaro had substantial goods carrying capacity in the middle section that was also occupied by the extra seats which did not cover the full width of the vehicle. The distinction between a vehicle being a car or van is very subjective.
While it has been decided that the Kombi is a “car” for benefit in kind purposes when there is personal use of the vehicle, when it is used solely or wholly in the business it will still be treated as a van. Furthermore, even when classed as a car for benefit in kind purposes it will still be classed as a van for road tax, so will not be subject to a CO2 weighting nor the £350 a year weighting if it costs over £40,000.
Vans that do not have rear seats or rear windows will always be regarded as vans, but where there are such seats and windows determining if the vehicle is a van or car becomes much more difficult. Any business that has such vehicles would be advised to look carefully at them to ensure the correct amount of tax is being paid.