Why HMRC will be checking P11D returns to ensure that vehicles have been classified correctly for tax purposes
Note: following representations from several affected parties, the government has decided to reverse the following guidance and confirmed that, from 1 July 2024, double cab pick-ups with a payload of one tonne or more would be treated as cars rather than goods vehicles for both capital allowances and benefit-in-kind purposes. The following article is therefore retained merely for historical purposes.
Effective from 1 July 2024, HMRC's interpretation of the legislation distinguishing between cars and vans for tax purposes diverges from the VAT classifications – as such, HMRC has updated its Employment Income Manual at EIM23151.
Previously, double cab pick-ups were categorised based on payload: those under one tonne were considered cars, while those over a tonne were vans. This approach was adopted for its practicality in determining the classification of double cab pick-ups primary suitability.
However, moving forward, the classification of double cab pick-ups will require assessing the vehicle, at the time that it was made available, whether the vehicle construction has a primary suitability as per the two-part test outlined at EIM23115 onwards.
Where no predominant suitability for the carriage of goods can be identified, the default should be that they are cars. Consequently, from 1 July 2024, most double cab pick-ups are likely to be classified as cars for benefit charge calculations due to their dual suitability for passenger and goods transportation.
Transitional arrangements
Transitional arrangements will apply for employers that have purchased, leased or ordered a double cab pick-up before 1 July 2024, whereby they will be able to rely upon the previous treatment until the earlier of disposal, lease expiry, or 5 April 2028. Examples are provided in HMRC guidance at EIM23151.
Why is the matter important?
Distinctions between company vans and cars are significant for tax implications. While negligible private use of a company van does not trigger a taxable benefit, any private use of a company car, however minimal, results in a taxable benefit.
Generally, benefits from company vans attract lower income tax and national insurance contributions (NIC) compared to company cars, except in cases of ultra-low or zero-emission vehicles.
Misclassifying vehicles as company vans instead of cars can be financially detrimental for employers. It can lead to underpaid taxes, including NIC liabilities, penalties and interest charges imposed by HMRC.
The Income Tax (Earnings and Pensions) Act 2003 (ITEPA) s.115 (1) defines a van as a mechanically propelled road vehicle designed primarily for goods transportation, with a design weight not exceeding 3,500 kilograms. Notably, motorcycles are excluded from this definition. Human beings are not ‘goods or burden of any description’ so a vehicle designed to carry people (such as a minibus) will not be a van for these purposes.
A notable legal case involving The Court of Appeal in Payne & Ors (Coca Cola) v R & C Commrs [2020] BTC19 considered whether three types of vehicle provided to employees by their employer were goods vehicles for the purposes of determining the cash equivalent of the benefit in kind. In doing so, the courts focused on the meaning of ‘construction’ and ‘primary suitability’ in the context of section 115 the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003).
The Court of Appeal found that all three vehicles were multi-purpose vehicles and as such were not ‘primarily’ suited to a particular use. To qualify as goods vehicles, the vehicle must be ‘primarily suited to conveyance of goods or burden of any description’. As this was not the case, the vehicles could not be vans, so must be classified as cars. HMRC commentary on the decision can be found in the Employment Income Manual at EIM23121.
HMRC highlights the decision, confirming its longstanding view that the ‘construction’ of a vehicle is that of the final product when made available to the employee, not the original construction. It also reiterated the decision of the court that a vehicle can only be classed as a van if it is predominantly suitable for the conveyance of goods or burden. In light of the decision, HMRC will be checking P11D returns to ensure that vehicles have been classified correctly for tax purposes.
What about capital allowances?
For expenditure incurred on or after 1 July 2024 HMRC will no longer interpret the legislation that defines a car for capital allowances purposes as excluding double cab pick-ups with a payload of one tonne or more. Section 268A(1)(b) Capital Allowances Act 2001, which defines a car as a vehicle other than one of a construction primarily suited for the conveyance of goods or burden of any description, will be interpreted in accordance with the guidance at CA23510. It follows that most, if not all, double cab pick-ups, which are equally suited to convey passengers or goods, will be classified as cars under this provision.
Transitional arrangements will apply when an amount of expenditure is incurred on a double cab pick-up as a result of a contract entered into before 1 July 2024 and the expenditure is incurred on or after that date but before 1 January 2025. In these circumstances a double cab pick-up with a payload of one tonne or more will continue to be treated as a van – HMRC has provided some examples at CA23511.
Note: the above guidance was withdrawn/reversed by HMRC on 19 February 2024.