One question we get asked more than any other is what company vehicle should I buy? From a tax perspective the stock answer is usually an electric car but are there any other great alternatives?
The other day, my client Jonathan asked the very same question, but unlike many of our clients Jonathan lives in a flat in London and an electric car was not a practical choice for him as there was no way he would be able to charge an electric vehicle without off-street parking. Jonathan is a director in a service sector business and a higher rate tax payer. He needs a vehicle to get to work and to transport his young family, but at the same time didn’t want a large tax bill. Hybrids could be the answer but they are expensive and the emissions can still be high. We suggested to Jonathan that he looks at 4×4 pickups! Not necessarily the obvious choice, but, there are a number of reasons why this might be a good idea:-
- Personal tax. The benefit in kind for commercial vehicles and the fuel they use is fixed. The benefit in kind for a commercial vehicle for the tax year 2020/21 is £3,490. As many readers will know, the benefits in kind for a company car is calculated as the manufacturer’s list price multiplied by a percentage based on emissions. Typically, the percentage can vary from 0% for a new electric car right up to 37%. For most cars the percentage will be between 15% – 25%. The typical average benefit in kind for a company car is usually around £6,000 and the tax bill for a higher rate tax payer based on that benefit is £2,400 per year. Let’s say however that you decided to go for a 4×4 pick up such as a Toyota Hilux 4 door double cab (2.8 diesel automatic) Invincible. The list price is approximately £42,000 with accessories. However, the Toyota Hilux is considered a commercial vehicle. As a result, the effective emission percentage is just 8.3%. The typical tax saving for a higher rate tax payer is about £1,000 per year. Even better is the fuel benefit in kind, which for a car is currently £24,500 x the emission percentage (typically about £4,900) compared with the fuel benefit for a commercial vehicle which is just £666. The typical tax saving for a higher rate tax payer is about £1,700. For most company car drivers a fuel benefit is too expensive, but not for commercial vehicle drivers.
- VAT. Unlike a car, if you buy a commercial car and you are VAT registered, you can recover all the VAT on the cost or lease of the vehicle.
- Corporation Tax. Again, unlike a car there are big corporation tax advantages with pickups being treated like plant and machinery and potentially the cost of the commercial vehicle can be 100% deductible against your profits by claiming annual investment allowance. Only brand new cars with emissions of 50g/km or less qualify for 100% first year allowances. Worse case if you have a high emission car your annual tax deductions could be as low as just 6% of the tax written down value of the vehicle every year.
- The quality. In America, pickups have been a huge seller for many years. However, over recent years the quality of the 4×4 pickups in the UK has greatly improved with models such as the Ford Ranger, Mitsubishi L200, Nissan Navara, Toyota Hilux, Mercedes X Class, Volkswagen Amarok all settling high standards for performance and comfort (leather upholstery, heated seats and parking sensors etc…).
So what is a commercial vehicle? For benefit in kind purposes most 4×4 pickups are deemed to be commercial vehicles. A commercial vehicle is defined under section 115 of ITEPA 2003 and is a vehicle with a design (laden) weight of 3.5 tonnes or less and is ‘a vehicle of a construction primarily suited for the conveyance of goods or burden’. For VAT purposes there is an additional requirement that to escape a car classification the vehicle must be capable of carrying more than 1 tonne.
HMRC’s general principle when deciding whether double cab pick-ups count as cars or vans is to look at both sets of rules. If double cab pickup has been built primarily for the conveyance of goods and has a payload of 1 tonne or more then HMRC usually accept the vehicle as a van for benefits purposes.
Word of warning
Please be careful with commercial vehicles as a whole. The well known makes of 4×4 pickup previously mentioned in this article will almost definitely be treated as commercial vehicles. Recently however there have been a number of cases of cars being modified to try and pass as commercial vehicles.
Specifically Coca-Cola provided their employees with three types of modified vehicle, each based on a panel van design but with a second row of seats behind the driver – a so called ‘crew-cab’ vehicle. The vehicles in question were a first or second generation VW Transporter T5 Kombi and a Vauxhall Vivaro. Coca-Cola argued that all the vehicles were vans and treated their employees as effectively receiving the lower van benefit in kind rather than a company car benefit. HMRC disagreed and said all the vehicles were cars and should be assessed for higher car benefits in kind.
The case went to the courts and the First Tier Tribunal (FTT) determined that because the Kombis were multi-purpose, they couldn’t be considered vans and therefore fell by default into the category of car. On the other hand, the FTT held that the Vivaro could be considered a van on fairly narrow grounds – essentially that the second row of seats didn’t span the width of the vehicle as they did in the Kombi. That extra load space in the middle of the vehicle therefore made it, just, a van. The Upper Tier agreed but HMRC decided to take the case to the Court of Appeal and won. The Court of Appeal determined that all three are multi-purpose vehicles, capable of carrying both goods and people and that none of them are ‘van-like’ enough. For benefit-in-kind purposes, they need to be taxed as cars.
Our advice is to stick to 4x4s or proper commercial vans- i.e. vehicles built initially as a commercial vehicle. Anything which is modified and was originally a car is likely to be treated by HMRC as a car and not a van. That is because HMRC will consider that modified vehicles fail to meet the definition of a commercial vehicle as they are not “a vehicle of a construction”, i.e. they were not intended to be designed as a commercial vehicle but modified afterwards.
Aren’t 4X4 pickups just for builders?
The choice of a 4×4 pickup as a company vehicle used to be considered as confined to builders. This has never been the case. Any business owner can own a 4×4 pick up. With the tax rules as they are, and the huge advances in the quality of the 4×4 pickups, maybe, like Jonathan, it is time for you to think again.
If you need any advice on company vehicles please contact Jan Friend or speak to your line manager.
The content in this blog is correct as at 15/09/2020. See terms and conditions.