Vehicles provided by the business – what do you need to know?

Understanding Tax Implications for Business Vehicles

One of the main areas of queries/advice requests we receive at TAG Accountants revolves around the business tax issues relating to the provision of vehicles, especially the tax implications for the business and its employees.

So, we have provided some clear guidance below around the key issues that should be considered, whether you are self-employed, a partner, company director, business owner or an employee.

VAT on cars

Firstly, it is useful to understand that for VAT purposes, HMRC defines a car as being, any motor vehicle normally used on public roads which has three or more wheels and either:

• is constructed or adapted mainly for carrying passengers or
• has roofed accommodation to the rear of the driver’s seat that is fitted with side windows or that is constructed or adapted for the fitting of side windows.

With limited exceptions (such as cars bought for use primarily as taxis; to provide driving instruction or self-drive hire cars), VAT is not usually recoverable on the purchase of a car. Should an exemption apply, and you can recover the VAT, there will be VAT implications on the sale of a car on which you have recovered VAT.

You may be able to recover VAT on the purchase in full if the car is to be used exclusively for the purposes of your business, provided it is not available for private use e.g. a “pool car” that is kept at the business premises and can be used by any employee – but be warned that you will need to be able to prove this is the case if HMRC query this and they will be sceptical.

If your business leases a car, it can usually recover 50% of the VAT on the lease charges.

Businesses can reclaim VAT on business-related running and maintenance costs, such as repairs, and on accessories fitted after purchase, provided they have a business use.

VAT on other vehicles (including double cab pickups)

Though recovery of VAT is not possible in most cases when you buy a car, the position for other vehicles is quite different. VAT on lorries, vans, and other commercial vehicles can be reclaimed if they are supplied to a registered business and used for business purposes.

The following vehicles are not considered cars for VAT purposes:

• vehicles capable of accommodating only one person or suitable for carrying twelve or more people including the driver.
• caravans, ambulances, and prison vans
• vehicles of not less than three tonnes unladen weight
• special purpose vehicles, such as ice cream vans, mobile shops, hearses, bullion vans, and breakdown and recovery vehicles
• vehicles with a payload of one tonne or more.

This definition is especially important when trying to differentiate between a vehicle that is a van or a car as it has important implications for other taxes besides VAT, such as capital allowances and benefits in kind.

There have been particular problems deciding where multi-purpose vehicles, like double cab pickups (DCPUs) fit in. Inevitably, HMRC has pushed for these vehicles to be designated cars. HMRC had planned to tax DCPUs as cars for capital allowances and benefit in kind purposes from 1 July 2024 and an announcement was made to that effect which was very quickly retracted.

The current position is that HMRC accepts that the one tonne payload definition of a van (used for VAT purposes) will apply for DCPUs for capital allowances and benefit in kind purposes. Though DCPUs with a payload of less than one tonne will fall into the car category, DCPUs with a one tonne payload will be treated as goods vehicles, not cars.

Vehicles provided to employees

Directors and other employees, provided with a car by their employer, face a benefit in kind charge as individuals, often referred to as ‘company’ car tax. The charge arises unless private use is excluded, which is technically exceedingly difficult to establish. For the employer, there are Class 1A National Insurance contributions at 13.8% (2024/25) on the benefit being provided.

The benefit calculation is based on the list price of the car plus particular taxable accessories (and note this relates to second hand cars too, so remember if you purchase a used car to provide to an employee, the original list price still applies in calculating the benefit in kind). The list price is multiplied by what is called the ‘appropriate percentage,’ which is determined by the CO2 emissions produced by the car. With the maximum percentage being 37%, the rules are weighted in favour of zero and low emission vehicles. Diesel vehicles incur a 4% supplement (subject to the 37% cap) unless they are RDE2 compliant.

It is worth noting that all-electric vehicles get particularly favourable tax treatment – the appropriate percentage for zero emission cars is 2% for 2024/25; 3% for 2025/26; 4% for 2026/27 and 5% for 2027/28. For hybrids, the electric range also matters. Cars with emissions between 1-50g/km, and a range of over 130 miles use the same percentage as zero emission cars.

Adjustment to the list price is made where employees contribute towards the cost of the car (up to a maximum of £5,000), where the car is provided for disabled drivers and for classic cars. There is a reduction in the charge when a car is provided for only part of the year.

If fuel is provided for private use of a vehicle, or costs are reimbursed, there is an additional benefit in kind charge – note that this does not apply to wholly electric cars but is punitive for non-electric cars and often not the best option for the employee – this is calculated as £27,800 multiplied by the appropriate percentage (which can be up to 37%).

Tax relief for a business buying a car

If your business buys a car outright, tax relief on the cost usually comes via capital allowances to offset against your taxable profits, which, unlike other capital purchases, are far from generous for most car purchases, with the exception of electric cars.

There are generous rules on capital allowances for businesses buying new electric cars or cars with zero CO2 emissions. These qualify for 100% first year allowances until 1 April 2025, meaning the entire expenditure can be written off against taxable income in the tax period in which incurred. You may want to consider this option while it is still available as there are no guarantees the first-year allowance will continue after this date.

For cars other than these, tax relief comes via writing down allowances (WDAs). WDAs are claimed by grouping items into pools, each with its own rate of capital allowances. A percentage of the value is then deducted from profits each year, with rates depending on when cars were acquired and CO2 emissions – the issue is that it is a much slower route to getting full tax relief on the cost of the car.

The capital allowance rates applying for cars purchased currently are as follows:

It is worth noting that acquiring a car via a business car lease has different tax consequences from an outright purchase. In this case, tax relief will be available on the lease costs (although the deductibility may be restricted depending on the car’s CO2 emissions and the business is not entitled to capital allowances).

Capital allowances for cars used partly for business and partly for private purposes by sole traders and partnerships are allocated to a single asset pool, with WDAs depending on CO2 emissions. The overall deduction allowed from trading profits is the business use proportion only (so if the car is used 50% for personal use, half of the capital allowances must be discounted). Some unincorporated businesses use the simplified expenses basis instead. This involves claiming flat-rate simplified deductions rather than actual costs.

Low emissions ensure most tax breaks

Existing tax policies favour low emission vehicles, as already noted. Some other tax incentives in this area include:

• 100% first year allowances for the purchase of new zero emission goods vehicles, gas refuelling stations and electric vehicle charge-points until 2025.
• Vehicle Excise Duty (VED): electric vehicles currently do not pay VED, and alternatively fuelled vehicles and hybrids pay a discounted rate until April 2025.
• Until 2025, the purchase of some low emission vehicles, such as taxis, trucks, and vans, qualifies for the government plug-in grant scheme, which gives a discounted purchase price on certain models.
• Employers may be able to use the government’s Workplace Charging Scheme to help buy and install electric vehicle charge-points at eligible places of work: funding is available until 31 March 2025.
• Employers can provide workplace charging for electric or plug-in hybrid cars and vans used by employees without a charge to tax or NICs.
• HMRC now accepts that there is no taxable benefit where employers reimburse employees for the cost of charging company-owned, wholly electric cars, available for private use.
• The rules on optional remuneration do not apply to cars with CO2 emissions of 75g/km or less, making such cars very attractive for salary sacrifice arrangements.

It is worth noting that many of these tax incentives could be set for change from 2025, especially following the change of Government and your business may want to factor this into planning its future strategy around vehicles.

Tax situation with business vans

The tax treatment of vans can be more advantageous than the treatment of cars, and for some businesses, van purchase has an appeal for exactly this reason. Buying a van can accelerate tax relief; vans purchased either outright or under an HP agreement are eligible for the Annual Investment Allowance (AIA), providing 100% relief upfront via capital allowances in full on purchase. The AIA is available to both incorporated and unincorporated businesses.

The taxable benefit position for vans is also treated differently e.g. where commuting is considered private use for a car, it is not so for a van.

Where vans are provided for employees with unrestricted private use, there is a flat rate benefit charge each year. This remains at £3,960 for 2024/25, and applies to all vans, regardless of age, and (where a van is capable of emitting CO2) regardless of emissions. The position overall can be compared favourably with the benefit in kind charge for the use of a company car. It is also worth noting that there is a nil rate for zero emission vans.

When vans are provided to employees mainly for business use and private use is restricted to commuting, the van benefit charge should not apply. What’s called ‘insignificant’ private use should also escape the charge, e.g. taking rubbish to the tip perhaps twice a year.

An additional fuel benefit in kind charge applies where employers provide fuel for unrestricted private use, which is £757 for 2024/25.

Helping you to get your vehicle strategy right

The run-up to April 2025 (when there could be significant changes in this area) provides a window of opportunity to maximise the existing tax incentives e.g., those for electric vehicles, and we would be pleased to discuss what this could mean for your business. How the situation pans out from 2025 onwards is unclear and it is worth looking at the business strategy for this area once the situation becomes clearer as it may need to be changed.

That is where TAG Accountants Group can help you. To see what our clients think of the excellent service they have received, from us, click on our testimonials link HERE.

Our friendly team is always here to help.

We believe that planning can result in significant savings for you and your business, and our team is always here to help with any decisions on business motoring so please contact us to book an appointment.

With that in mind, call us here at TAG Accountants Ltd, Wolverhampton on 01902 783172 to speak with one of our experts or just click HERE to contact us via the form on our website and one of our team will be in touch.

We look forward to hearing from you.