Car or van? HMRC tax rules

28th January 2020

The HMRC rules on whether a company vehicle is a car or van is a notoriously grey area. We’ve written previously about the classification issues that can arise with double-cab pick-ups and kombi vans  and it seems that it’s an area that continues to cause confusion when it comes to understanding what tax reliefs you may be eligible for.

In this article we’re giving you a refresher on what HMRC says about vehicle classification and things to bear in mind when it comes to vehicle tax relief. 

Car or van? HMRC rules

Car or van? HMRC’s definition might not be what you expect

For the purposes of tax benefits, HMRC currently defines a car as:

“a mechanically propelled road vehicle that is not:

  • a goods vehicle (a vehicle of a construction primarily suited for the conveyance of goods or burden of any description).
  • a vehicle of a type not commonly used as a private vehicle and unsuitable to be so used.
  • a motor cycle as defined in Section 185(1) of the Road Traffic Act 1988
  • an invalid carriage as defined in Section 185(1) of the Road Traffic Act 1988″

So, essentially, a company car is any vehicle which isn’t a van, a motorbike, invalid carriage (i.e. a mobility scooter) or other vehicle which is unsuitable for use as a private vehicle (e.g. quad bike).

The key point for us is the first one – but what qualifies a goods vehicle as having a construction primarily suited for carrying goods? That’s where the confusion comes in.

HMRC says that a van is a goods vehicle primarily constructed for delivering goods and has a fully laden gross weight of 3.5 tonnes.

As we explained in our previous article, there are also structural criteria which must be met to class a vehicle as a van, including that there should be no windows and that the load bay is significant enough to mean that carrying passengers is not the primary purpose.

Understanding how to classify your Kombi van can be confusing

The Kombi question

Double-cab pick-ups and car-derived (kombi) vans add an extra layer of confusion. This is because while you might be using such a vehicle as a van, the additional row of seats means that HMRC may define it as a car. In order to be classed as a “commercial vehicle” (and qualify for tax reliefs), it needs to have a payload of more than one tonne after seats and have a dedicated load area that is larger than the passenger area.

The most commonly questioned vehicles are listed on HMRC’s website here.

Car-derived vans

There are very few types of car-derived vans, and HMRC gives Ford Fiesta vans, Renault Clio vans and Vauxhall Corsa vans as examples. These types of vehicles are subject to slightly different rules as they are constructed as and maintain the appearance of cars from the outside, however inside they will look and function like a van.

HMRC identifies car derived vans as vehicles which are:

  • “designed to weigh no more than 2 tonnes when loaded fully
  • based on car designs or the vehicle is built from a platform which has been designed and developed to be built as a car or a van by the same manufacturer”

Additionally, a car-derived van will have no rear seats or windows (unless opaque or fixed) and will instead have a payload area with floor panel.

Further information about the rules on car-derived vans can be found here.

Tax relief

Once you have determined if HMRC thinks your vehicle is a car or van, you will be able to work out if you qualify for any tax relief. If your vehicle is, in fact, a van, then there are a number of schemes you can benefit from.

Benefit-in-Kind

Benefit-in-Kind tax (also known as company van tax) is a tax levied against your van if you also use it for personal use. If you use your van exclusively for business use then there is no BiK to pay because it is not classed as a “business perk”.

HMRC does allow for “insignificant private use” however the scope for this is very limited. For example, using your van to travel to a one-off doctor’s appointment on the way to work would be acceptable but using it regularly for the school run would not.

If a company van is also for private use, then the business will need to report it to HMRC and pay a standard fixed BiK rate (currently set at £3,430 for 2019/20). This is still often a more affordable option for businesses, as BiK rates for company cars are on a sliding scale based on their list price and CO2 emissions.

Capital Allowance

Businesses with vans can also benefit from relief on capital allowances. Vans qualify under the annual investment allowance (AIA) which allows companies to claim tax relief on certain items purchased for use within the business known as ‘plant and machinery’.

HMRC has temporarily increased the limit on AIA from January 1st 2019 to December 31st 2020, meaning the current limit is £1million (usually £200,000).

VAT relief

Unlike cars, businesses can claim full VAT relief on vans but be aware that if it is used for both commercial and private trips then the amount you can claim will need to be adjusted accordingly. It’s important to keep good records, including fuel receipts and details of commercial trips taken, in order to prove to HMRC how much VAT relief you qualify for.

Car or van? HMRC vs. Coca-Cola

As we discussed in our previous article on vehicle classification, a landmark court case between HMRC and Coca-Cola in 2017 added further confusion to defining whether a double-class vehicle is a car or van.

Coca-Cola argued that its three vehicles – two VW Kombis and one Vauxhall Vivara – were all vans, however HMRC believed they should be classed as cars for tax purposes. Ultimately the tribunal ruled that the Kombis were cars due to their capacity to carry both passengers and cargo, whereas the Vivara was a van as it was primarily suited for carrying goods.

The ruling resulted in several urgent calls for HMRC to clear up its confusing rules surrounding double-classification vehicles, however as yet the rules remain unchanged.

Talk to the experts

As we’ve established, the “car or van?” question continues to cause confusion when it comes to HMRC. We know it’s a grey area and companies can face hefty fines if they fall foul of the rules. If you’re not sure if you’ve made the right call on your company vehicles, get in touch with our friendly tax team for support and guidance.

Chartered Accountants in Sunderland, offering expertise on everything from Tax and Business Planning,
to Accounts and VAT.