Historically, a company van has been a pretty tax efficient perk. Granted, you are probably not going to the get the same admiring glances from other drivers driving a Ford Transit van as you would cruising around in a soft top sports car or SUV, but with a van attracting a maximum cash equivalent value of £500 it is arguably the van driver who has had the last laugh.
However, this is soon to change. From 2007—08 onwards, all vans available for private use will be taxed by reference to a cash equivalent value of £3,000. If this is not enough of a hike, a separate van fuel charge of £500 will also apply if the employer provides fuel for private mileage in a company van.
Allowing company van drivers unlimited private use from April 2007 onwards may no longer be tax or NIC efficient. Maybe time to review the van policy?
Van Tax Charge
Allowing a company van driver to use the van for private use may give rise to a tax charge. Following a period of consultation, the regime for taxing the benefit derived from the private use of a company van was overhauled with effect from 6 April 2005. The changes were phased in gradually. The old scales rates remained for 2005—06 and 2006—07, with the new higher charge and separate van fuel charge taking effect from 2007—08.
Since 6 April 2005, the cash equivalent of the benefit depends on various factors and, in particular, the degree of private use. If there is no private use, no charge arises. Similarly, if there is limited private use and that private use meets the `restricted private use’ condition, the cash equivalent of the benefit is nil. This is an improvement on the pre April 2005 regime where any private use was sufficient to trigger a tax charge. Not surprisingly, the charge applies in full if the van driver enjoys unlimited private use of a company van.
For 2005—06 and 2006—07, the cash equivalent of the benefit where there was unrestricted private use was £500 if the van was under fours years old at the end of the tax year, and £350 if the van was at least four years old at the end of the tax year. For 2007—08 onwards, the cash equivalent value rises to £3,000 regardless of the age of the van.
The charge may be reduced if the van is not available throughout the tax year or is shared with other drivers.
Restricted Private Use Condition
Not all private use is bad. From 6 April 2005 it has been possible to do a limited amount of private mileage in a company van without triggering a tax charge. However, for the cash equivalent to remain at nil, any private use must meet the restricted private use condition.
There are essentially two parts to this test. The first is that the “commuter use” requirement is satisfied throughout the year (or part of the year) for which the van was available to the employee, or the extent to which it is not satisfied is insignificant. The second part of the test requires the “business travel” requirement to be satisfied throughout the year (or part of the year) for which the van is available to the employee.
Commuter Use Requirement
The commuter use requirement must be met for the restricted private use condition, and therefore the nil charge, to apply.
The commuter use requirement is satisfied at any time if:
- the terms on which the van is made available to the employee at the time prohibit its private use otherwise than for the purposes of ordinary commuting or travel between two places that for practical purposes is substantially ordinary commuting; and
- neither the employee nor a member of the employee’s family or household makes private use of the van at the time otherwise than for those purposes.
The definition of ordinary commuting is the same as that as applies in determining the deductibility of travel expenses. Basically, it means travel from your home to your normal place of work.
A little bit of leeway is allowed. If the commuter use requirement fails to be met to an insignificant extent it is still possible to meet the restricted private use condition for the year as the insignificant private use is disregarded.
In deciding whether any non-commuting private use is `insignificant’ HM Revenue and Customs apply the ordinary English meaning of the word. Private use is regarded as insignificant if it is:
- insignificant in quantity in the tax year as a whole (e.g. occurs on only a few days at most);
- insignificant in quality (e.g a week’s exclusive private use would not be insignificant);
- very much the exception in terms of the pattern of use of that van by the employee in that tax year; or
- insignificant in absolute terms, not just as proportion of other use.
Examples of use that HMRC accept as being `insignificant’ include using the van to take an old mattress or other rubbish to the tip once or twice a year, a regular detour to drop a child off at school or stop at the newsagent on the way to work or to call in at the dentist on the way home. However, using the van to do a weekly supermarket shop, taking it on holiday or using it outside work for social activities would not be treated as insignificant and the use of the van in such a way would trigger the full tax charge. So beware – “insignificant” means just that.
Business Travel Requirement
The business travel requirement is satisfied if the van is available to the employee mainly for the purposes of the employee’s business travel. This essentially means that the main reason the employee has the van is in order to do his or her job.
Harry drives a van for a living, making deliveries of furniture to customers. He keeps the van at home and his employer allows him to use it for private purposes. There is no restriction on the private use. His employer also pays for all fuel for both business and private travel.
The van was new in March 2006.
Harry is a basic rate taxpayer.
For 2006—07 he is taxed on the private use by reference to the cash equivalent value applying to vans under fours years old of £500. This means the private use of the van costs him £110 in tax. His employer will pay Class 1A NICs of £64.
In 2007—08, Harry will suffer the full charge applying to all vans of £3,000. He will also be charged the new van fuel scale charge of £500, giving him a total van benefit of £3,500 and an associated tax bill of £770. This is £660 more than he paid in 2006—07 – a rise of 600%.
For 2007—08 his employer’s Class 1A NIC charge will increase to £448.
Minimising The Pain
The restricted private use condition offers the opportunity for a possible solution. By restricting use of the van to travel to and from work and business travel, it is possible to reduce the charge to nil. If the driver still needs a vehicle for private use, it may be worthwhile consider the provision of a company car. By choosing the vehicle carefully (i.e. one that is not too expensive and has low CO2 emissions) it is possible to bring the cash equivalent cost for the car in at below £3,000, making it a more tax efficient option than using a van for private journeys.
A small car with a list price £10,000 has Co2 emissions of 156g/km. Fuel is provided for private use. Fuel is also provided for private mileage.
For 2006—07 the cash equivalent of the car is £1,800. This is a saving of £1,200 on the van cash equivalent, saving a basic rate taxpayer £264 a year.
Fuel is trickier. The van fuel charge is still much cheaper than car equivalent. Even with emission of 14g/km or below and an appropriate percentage of 15%, the car fuel charges will come in at £2,160 – a figure that rises as CO2 emissions rise. This is considerably more than the van charge of £500. Sadly, it is not possible to mix and match and take the van fuel charge and company car cash equivalent and it is a question of doing the maths to determine which is the better option.
- Maybe the company car is not that unattractive after all?