HMRC has issued new tax guidance which will result in double cab pick-ups being classified as company cars from July 1, 2024.

The new rules apply to all double-cab pick-ups ordered after July 1 - any vehicles already on fleet or ordered before July will be subject to the existing classification until April 2028.

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Fleets were warned last year that they could be “sleepwalking into a significant tax liability” with HMRC investigating vehicle classification for benefit-in-kind (BIK) tax purposes. 

It follows years of debate around legislation defining the tax treatment of when a vehicle is a van or a company car.

One of the most notable instances involved Coca-Cola, which resulted in HMRC winning the appeal that Coca-Cola’s Vauxhall Vivaro and VW Transporter T5 Kombis (1st and 2nd generation) were cars and not vans. 

“This finally brings clarity to an area of company car taxation that has been dogged by technical arguments for some time,” Matt Hammond, AFP

The decision to classify double cab pick-ups as company cars by default will hit the bottom line of fleets, because cars are more expensive from an Income Tax and NIC perspective than vans – this is also true of any associated fuel benefit provided.

It will also mean the benefit in kind paid by employees will rise by thousands of pounds a year. Currently all pick-ups are subject to a fixed benefit of £3,960 (see table below).

Mike Hawes, chief executive of automotive trade body, the Society of Motor Manufacturers and Traders (SMMT), said: “Double cab pick-ups are critical business tools for many companies and sole operators across Britain, particularly in rural areas and in the construction sector.

“HMRC’s decision to tax them as cars rather than commercial vehicles for benefit-in-kind (BIK) purposes will raise costs significantly, and make them an untenable choice for many.

“The move risks stalling the overall market and its decarbonisation, as businesses will be likely to hold on to older vehicles for longer.”

He added: “With the new rules due in July, there is insufficient time for industry to adapt to such a major policy change, and the sector believes that it would be remain fairer and simpler to use a vehicle’s type approval as the basis for all tax purposes.”

In the new advice, published by HMRC this week, it says that from July 2024, HMRC will no longer interpret the legislation that defines car and van for tax purposes in line with the definitions used for VAT purposes.

This VAT approach for double cab pick-ups differentiated based on payload, with anything under one tonne classified as a car, and anything a tonne and over as a van. This rule, it says was replicated as a “pragmatic way” of resolving the primary suitability and classification of double cab pick-ups. 

However, it added that this “finely balanced test” is at odds with the judgement reached by the Court of Appeal in relation to the Coca Cola case.  

This confirmed that when applying the primary suitability test at Section 115 ITEPA 2003, decisions shouldn’t be reached on a narrow margin. 

Furthermore, it clarified that where there are finely balanced cases, where no predominant suitability for the carriage of goods can be identified, the default should be that they are cars.   

Going forward, it says that classification of double cab pick-ups will therefore need to be determined by assessing the vehicle as a whole at the point that it is made available to determine whether the vehicle construction has a primary suitability as per the two-part test outlined in the Employment Income Manual. 

Matt Hammond, deputy chair of the Asaociation of Fleet Professionals (AFP), said: “This finally brings clarity to an area of company car taxation that has been dogged by technical arguments for some time and, in some respects, removing that degree of confusion is very welcome.

“The transition period put in place by HMRC is both welcome and fair, and should give fleets time to make new arrangements as well as allowing manufacturers time to align their model ranges with the new regulations.

“Some fleets and drivers will no doubt feel this unfairly removes some vehicle choices they would like to make but bringing the rules into line with VAT makes some sense.”

Tax implications

With almost all double cab pick-ups being classified as company cars and attracting BIK from July 1, employees will also face having to pay more tax.

However, HMRC has put in place transitional arrangements so both employers and employees do not incur higher taxes for vehicles already on fleet and on order (see below).

John Messore, joint owner of Innovation Tax and Mileage Consulting Group, told Fleet News: “The most common double cab pick-up in the UK is the Ford Ranger with a list price of circa £60,000 and CO2 emissions of over 200g/km putting it squarely in the 37% tax bracket meaning a BIK of circa  £22,200 a year leading to employee tax of £8,880 a year for a 40% taxpayer or £13,320 a year at 60% tax or £1,110 a month.”

He continued: “If free private fuel is also provided (which it probably should be historically as it is currently a no brainer at such low levels of tax) that is a combined benefit of £32,486.

“This will have an additional Class1A NIC cost of £4,483 to the employer, whilst the total tax for a higher rate taxpayer is £12,994 per annum.”

He explained: “Under the current rules provided the payload of the pick-up is 1 tonne or over then by concession it is taxed as a van benefit in kind meaning £757 fuel BIK and £3,960 benefit for the van.

“Under the new rules, which HMRC states is the correct default position following the Coca Cola case there will be an extra £15k p.a. tax and NIC.

“This is potentially bad news for the double cab market as the tax rules may discourage such vehicles going forward.”

He added: “HMRC has announced it will only change the rules from 1 July 2024 so if you want to take advantage of the old concession you need to order the vehicle before 1 July.

“It is disappointing that they are changing this concession in the middle of a tax year. It would surely have been cleaner to wait until the start of a new tax year – say 6 April 2025.

“Also, the guidance is silent on fuel and so what happens if a van is replaced before 1 July but private fuel is only provided after 1 July?”

Furthermore, Messore said employers will have to be careful about optional remuneration arrangements (OpRA), while noting such vehicles do not lend themselves to salary sacrifice.

He explained that they are instead are more suited to an employee car ownership scheme (ECOS) whereby there is a credit sale agreement with a guaranteed arm’s length buy back price.

“By entering ECOS there are still significant savings to be made as the normal car BIK rules do not apply if there is an actual transfer of ownership to the driver,” he said.

“The guidance implies that the VAT rules will also be different from the income tax rules adding complexity and uncertainty.

“If a vehicle is treated as a car for VAT purposes then there is a 50% restriction on input VAT on lease costs (but not maintenance costs).

“If double cab picks continue to be treated as vans for VAT purposes, then there is still a restriction but based on private use.

“For example, if 20% of the van’s use is business and 80% is private then you can only reclaim 20% of the Input VAT. Mileage records will still need to be kept.”

The vast majority of double cab pick-ups will also be treated as cars for capital allowance purposes from July 1.

Double-cab pick-up	Before (£)	After (£)	Difference (£)
Van BIK	3,960	22,200	18,240
Fuel BIK	757	10,286	9,529
Total BIK	4,717	32,486	27,769
Employee tax at 40%	1,887	12,994	11,108
Employer NIC at 13.8%	651	4,483	3,832
Additional tax and NIC cost			£14,940

 

Transitional arrangements 

Transitional arrangements will apply for employers that have purchased, leased, or ordered a double cab pick-up before July 1, 2024, whereby they will be able to rely upon the previous treatment until the earlier of disposal, lease expiry, or April 5, 2028.  

The position prior to July 2024 remains unchanged. 

HMRC has given the following examples which all relate to double cab pick-ups made available to employees, that are not of a construction primarily suited for the conveyance goods or burden.

Example 1 – Employer A purchased a double cab pick-up on September 14, 2024.  As purchases on or after 1 July 2024 would be subject to the new rules, in this example the vehicle would be classified as a car and a car benefit charge would arise. 

Example 2 – Employer B leased a double cab pick-up on April 10, 2024.  As this was leased before July 1, 2024, the previous rules continue to apply for Employer B until the earlier of the lease expiry, or April 5, 2028. 

Example 3 – Employer C purchased a double cab pick-up on July 10, 2023. This was subsequently traded in on November 1, 2024, for another double cab pick-up.

The previous rules apply to the first vehicle for Employer C until the trade in point on November 1, 2024. As the new double cab pick-up was purchased after July 1, 2024 it will represent a car under the new rules and a car benefit charge would arise. 

Example 4 – Employer D placed an order for a double cab pick-up on January 5, 2024, but this was not available to the employer until September 2, 2024.

As the agreement was entered into before July 1, 2024, the previous rules continue to apply for Employer D until the earlier of disposal, lease expiry, or April 5, 2028.