Taxing new vehicle purchases
Taxing a new car or van will depend on its eco credentials, and whether it’s defined as a car or a van, which is not always straightforward.
When it comes to new cars, the commercial fleet and company car market is a primary driver for new car registrations, making up 55.9% of all new car registrations in 2019.There has been a recent shift in the fuel types of newly registered cars, as shown in Table 1.How can the tax system influence vehicle purchasing? The rules vary depending on whether the vehicle is a car or a van and its eco credentials.
When is a car a van, and vice versa - legal definitions
You would think this would be a relatively easy question to answer, but there are blurred lines. While some of the definitions are similar between tax codes, the VAT definition of a car is completely different. I’ll touch on these as I explain each set of rules.
Some definitions also contain a degree of subjectivity. For example, many of the definitions of a car exclude a vehicle of a construction primarily suited for the conveyance of goods or burden of any description. This definition is the focus of the Coca-Cola case (a car benefits case). The First-tier Tribunal found that a Vauxhall Vivaro was a van on this basis, but that first- and second-generation VW Kombi Transporter T5s were not Noel Payne & Ors [2017] UKFTT 655 (TC). The Upper Tribunal agreed, The Commissioners for HM Revenue and Customs and Noel Payne, Christopher Garbett and Coca-Cola European Partners Great Britain Limited [2019] UKUT 0090 (TCC). It should be noted that the vehicles in this case were customised, so it will not provide a definitive answer for these models. It is understood that the case is due to be heard by the Court of Appeal in June.
Benefits code
It should be noted that the vehicles in this case were customised, so it will not provide a definitive answer for these models. It is understood that the case is due to be heard by the Court of Appeal in June.
The car and van benefits code is the one that interests most individuals, as the tax hits their pocket. Starting with definitions, a car is defined in the negative. A car is not a goods vehicle, motorcycle, an invalid carriage, or a vehicle of a type not commonly used as a private vehicle and unsuitable to be so used. A van is a goods vehicle, has a design weight not exceeding 3,500kg, and is not a motorcycle. A goods vehicle is a vehicle of a construction primarily suited for the conveyance of goods or burden of any description.
The calculation of car benefits has been linked to emissions since 2002. This is relatively fast changing and often an announcement is superseded before it comes into force. The latest set of changes is contained in the draft Finance Bill and reflects the adoption of the worldwide harmonised light vehicles testing procedure (WLTP) for the purposes of establishing the emissions of cars first registered from 6 April 2020.
It is proposed that the appropriate percentage for calculating the car benefit will be as set out in Table 2 (overleaf) for the next three tax years. As can be seen, there is a clear incentive for choosing zero or low-emission cars. Even though the list price of these cars can be much higher than their petrol equivalents, the attraction of no benefit in kind charge for the employee (and no class 1A NIC charge for the employer) could mitigate the extra cost.
Vans that fall outside the restricted private use provisions are subject to a fixed benefit charge (£3,430 in 2019/20). This is reduced to 80% of the charge in 2020/21 and 90% of the charge in 2021/22 for zero-emission vans. The incentive to choose ‘green’ for a van is much lower.
Where fuel is provided, the calculation of the benefit charge is linked to emissions for cars but is a lower fixed amount for vans. The provision of electricity for vehicle charging falls outside these rules and there is an exemption where an employer provides charging facilities at or near the workplace where the provision is generally available to employees at that workplace.
Capital allowance
The writing down allowance rate for business purchases depends on whether the vehicle is a car or a van and its emissions.The definition of a car is similar to that in the benefits code, although no reference is made to invalid carriages.
Cars are one of the few general exclusions from the annual investment allowance (AIA). However, first-year allowances are available for expenditure on new electric cars or new cars with CO2 emissions not exceeding 50g/km incurred on or before 31 March 2021. Otherwise, capital allowances are available at the main rate of 18% for cars registered before 1 March 2001, electrically propelled cars and low-emission cars (not exceeding 110g/km for expenditure incurred on or after 1 April 2018). All other expenditure on cars attract allowances at the special rate of 6%.
First-year allowances are available for expenditure on new zero-emission vans incurred on or before 31 March 2021 for corporation tax and 5 April 2021 for income tax. These first-year allowances are a form of state aid. They are subject to a €85m lifetime limit on qualifying expenditure by an enterprise. This is unlikely to be breached, although expenditure by linked and partner enterprises needs to be considered. A claim is also not possible where:
- the business is an undertaking in difficulty;
- the business is subject to an outstanding recovery order for illegal state aid;
- expenditure is incurred for the purposes of a qualifying activity in the fishery or aquaculture sector or relating to the management of waste of undertakings;
- expenditure is subsidised by a grant or payment that is a notified state aid.
This may influence whether the business claims a first-year allowance or the AIA on a zero-emission van, if available.
Expenditure on new electric vehicle charging points also qualifies for first-year allowances where the expenditure is incurred on or before 31 March 2023 for corporation tax and 5 April 2023 for income tax.
Unless the Budget on 11 March extends the periods for claiming first-year allowances, the combination of these and the low benefit-in-kind charge makes purchasing new cars with emissions not exceeding 50g/km particularly attractive until 31 March 2021.
Leasing
Many businesses choose to lease rather than purchase vehicles. However, a 15% disallowance of the expenditure incurred on leasing certain cars can apply.
The definition of a car is similar to that used for capital allowances, save that it is also referred to as a ‘mechanically propelled road vehicle’.
The 15% restriction does not apply to cars meeting the same definition as a ‘main rate’ car for capital allowances; namely cars registered before 1 March 2001, electrically propelled cars and low-emission cars (currently 110 g/km).
Vehicle excise duty
Vehicle excise duty has changed for cars first registered on or after 1 April 2017. There is an initial licence fee based on the car’s emissions and fuel type, ranging from £0-£2,135 from 1 April 2019.
The annual duty charge is then a fixed amount based on the fuel type, ranging from £0-£145 from 1 April 2019. Where the car has a list price of more than £40,000, an additional £320 is payable for five years from the start of the second licence, even if the car is an electric car that would otherwise attract no annual charge.
The draft Finance Bill includes a clause to use WLTP as the basis for the car’s emissions where the car is first registered on or after 1 April 2020.
There are four different tax classes for vans weighing no more than 3,500kg with the annual fee ranging from £140-£265 from 1 April 2019.
VAT
For VAT, the key difference in tax treatment depends on whether the vehicle is a car or a van (emissions don’t come into the equation). Subject to some limited exclusions, input VAT cannot be claimed on the purchase of a motor car. Where a car is leased or hired, the general rule is that only 50% of the input VAT on the hire charges can be claimed.
As mentioned previously, the definition of a motor car for VAT is completely different to the other taxes. A ‘motor car’ means any motor vehicle of a kind normally used on public roads which has three or more wheels and either:
a) is constructed or adapted solely or mainly for the carriage of passengers; or
b) has to the rear of the driver’s seat roofed accommodation, which is fitted with side windows or is constructed or adapted for the fitting of side windows. The following are not a ‘motor car’ for the purposes of VAT:
i) vehicles capable of accommodating only one person;
ii) vehicles which meet the requirements of Sch 6, Road Vehicles (Construction and Use) Regulations 1986 and are capable of carrying 12 or more seated persons;
iii) vehicles of not less than three tonnes unladen weight (as defined in the Table to reg 3(2), Road Vehicles (Construction and Use) Regulations 1986);
iv) vehicles constructed to carry a payload (the difference between a vehicle’s kerb weight (as defined in the Table to reg 3(2), Road Vehicles (Construction and Use) Regulations 1986) and its maximum gross weight (as defined in that Table)) of one tonne or more;
v) caravans, ambulances and prison
vans; and
vi) vehicles constructed for a special purpose other than the carriage of persons and having no other accommodation for carrying persons than such as is incidental to that purpose.
Conclusion
With business purchases making up a significant part of the new vehicle market, tax policy has taken a key role in changing the purchasing decisions in relation to new vehicles. However, inconsistent and subjective definitions can cause uncertainty over the cost for both business and employees.
It will be interesting to see the extent to which the Budget on 11 March will tackle these issues and continue to support the move towards lower emission vehicles.
Table 1 fuel types in newly registered cars
| 2019 |
2018 | 2017 | 2016 | 2015 | |
|---|---|---|---|---|---|
| Petrol | 64.8% |
61.9% |
53.4% |
49.0% |
48.8% |
| Diesel |
25.2% |
31.5% |
42.0% |
47.7% | 48.5% |
| Alternatively powered vehicles |
10.0% |
6.6% |
4.6% | 3.3% |
2.8% |
Table 2 Proposed figure for calculating car benefits
| Appropriate percentage | |||||
|---|---|---|---|---|---|
| Car CO2 emissions figure g/km | Registered before 6 April 2020 | Registered on or after 6 April 2020 |
Registered before 6 April 2020 | Registered on or after 6 April 2020 | |
| 0 | 0% | 0% | 1% | 1% | 2% |
| 1–50 Electric range figure: 130+ 70–129 40–69 30–39 < 30 |
2% 5% 8% 12% 14% |
0% 3% 6% 10% 12% |
2% 5% 8% 12% 14% |
1% 4% 7% 11% 13% |
2% 5% 8% 12% 14% |
| 51–54 |
15% | 13% |
15% |
14% |
15% |
| 55–59 |
16% |
14% |
16% |
15% |
16% |
| 60–64 |
17% | 15% | 17% | 16% | 17% |
| 65–69 |
18% | 16% | 18% | 17% | 18% |
| 70–74 |
19% | 17% | 19% |
18% | 19% |
| 75–79 |
20% | 18% | 20% | 19% | 20% |
| 80-84 |
21% | 19% | 21% | 20% | 21% |
| 85–89 |
22% | 20% | 22% | 21% | 22% |
| 90–94 |
23% | 21% | 23% | 22% | 23% |
| 95–99 |
24% |
22% |
24% |
23% | 24% |
| 100–104 |
25% |
23% |
25% |
24% |
25% |
| 105–109 |
26% |
24% |
26% |
25% |
26% |
| 110–114 |
27% |
25% | 27% | 26% | 27% |
| 115–119 |
28% |
26% |
28% |
27% |
28% |
| 120–124 |
29% | 27% |
29% | 28% |
29% |
| 125–129 |
30% |
28% |
30% |
29% | 30% |
| 130–134 |
31% | 29% |
31% | 30% |
31% |
| 135–139 |
32% | 30% |
32% | 31% |
32% |
| 140–144 |
33% |
31% | 33% |
32% |
33% |
| 145–149 |
34% | 32% |
34% | 33% |
34% |
| 150–154 |
35% | 33% |
35% |
34% |
35% |
| 155–159 |
36% |
34% |
36% |
35% |
36% |
| 160–164 |
37% |
35% |
37% |
36% |
37% |
| 165–169 |
37% |
36% |
37% |
37% |
37% |
| 170+ |
37% |
37% |
37% |
37% |
37% |
About the author
Lindsey Wicks, Technical Editor, ICAEW Tax Faculty