Van Taxation: Picking up the tax bill
Wednesday, August 17, 2011
Commercial vehicle operators need to be aware of the distinctions between significant and non-significant private mileage. James Dallas treads a fine line
Van taxation came under the spotlight halfway through the previous decade when then-chancellor Gordon Brown got wind of the fact that light commercial vehicles, and in particular double cab pick-ups, were becoming increasingly popular as tax-efficient alternatives to company cars.
Brown reckoned employees were dodging tax by switching to pick-up trucks from cars, a trend that subsequently appeared to be limited. After all not many people are likely to feel comfortable switching from say, a hatchback or an estate to a far larger vehicle.
Nevertheless, changes to the tax rates for the private use of company vans were included in the 2005 Budget and subsequently phased in.
From 2007 benefit-in-kind on vans jumped from £500 to £3000 resulting in a £600 tax bill for employees on the 20% rate or £1200 for those on the 40% rate. There is a further free-fuel benefit charge of £550, which is taxed at £110 in the 20% band and £220 in the 40% band.
Unlike passenger cars, all vans with a payload of at least a tonne are taxed at the same rate whether you drive a long-wheelbase Ford Transit or a Peugeot Bipper, and even taking account of the increased charges, the amount you’ll pay for the private use of a double-cab pick-up is still considerably less than what you’d pay for a large 4WD SUV.
According to van leasing firm Autorama, the total annual tax bill for a 20% taxpayer for a Mitsubishi L200 Animal with an on-the-road price of £23,574 works out at £700 whereas for a Nissan X-Trail 2.0 dCi Sport the bill comes in at £2385. In the 40% band these figures rise to £1400 and £4771, respectively.
The self-employed are exempt from company van tax but can still claim back VAT if registered.
The distinctions between what is viewed as private mileage and what is not are worth knowing. According to HM Revenue & Customs (HMRC), if the van is used mainly for work journeys, such as making goods deliveries or calling on customers and the only private use is commuting, there is no tax to pay. So, for example, it’s permitted to stop off at the local shop on the way to and from the office or depot, but use the van for the weekly trip to the supermarket and you become liable for tax, which is usually collected through your Pay As You Earn (PAYE) tax code. However, some private use is permissible without incurring tax liability if it is considered insignificant.
HMRC helpfully provides some examples of what constitutes “insignificant private use”. Basically it should be the exception to the normal pattern of van usage, intermittent and irregular, and it should “last only for short periods of time on odd occasions during the year”. So it’s OK for an employee to take “an old mattress” or other rubbish to the tip once or twice a year, regularly make a “slight detour” for the school run or call at the dentist on the way home from work. On the other hand it’s not OK to take the van away on a week’s holiday or use it for social activities outside
In order to avoid tax liability for its workforce an employer must be able to show HMRC that there is no significant private use. This can be done through asking staff to keep mileage records, get employees to sign an agreement about their use of vans or to outline the terms of permitted van use in employment contracts and the disciplinary consequences of abusing them. The employer should be able to prove that the van is used primarily for work journeys and that private use is restricted to commuting between home and work.
The tax charge is reduced if an employee does not use a van for the whole tax year or if the van is shared with a colleague for private use, in which case the charge is split between them.
If the employee contributes towards the van’s private use the tax is reduced, but the fuel charge is not reduced unless the employee pays back the cost of all the fuel provided for private use.
The employer, if it considers an employee should pay reduced tax, must be able to show HMRC records of how its vans are shared, periods of 30 or more consecutive days when vans have been off road, contributions paid by employees towards private use of vans, and proof that private fuel has been fully reimbursed.
Vehicle Excise Duty
Road tax for vans is not yet based on emissions as it is for cars. VED for vans is determined by when the vehicle was first registered and its Euro standard. If registered before 2001 a van’s VED is based on engine size. So, from April 2011 engines of up to 1549cc cost £130 a year and those of at least 1550cc cost £210. The six-monthly rates are £71.50 and £115.50 respectively.
Euro4 vans registered between March 2003 and December 2006 are liable for £130 VED a year and £71.50 for six months (up from £68.75 since 1 April 2011). Euro5 vans are subject to the same charges.
All vans registered outside of these dates pay road tax of £210 a year and £115.50 for six months. These rates increased by £10 and £5.50 respectively on 1 April.