Lee Sharpe highlights several problem areas for HMRC with the taxation of motor vehicles, where the taxpayer may stand to benefit.
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We have a special regime for the taxation of motor vehicles, the principles of which were set out many years ago. But there is still scope for disagreement with HMRC, and it often does not go HMRC’s way.
Set out below are some quite recent developments in the taxation of cars and vans.
Mini-vans and double cab pickups
There was a chain of tax cases concerning the correct benefit-in-kind treatment of vans whose designs had been derived from cars, culminating in Payne & Ors (Coca-Cola) v HMRC [2020] EWCA Civ 889 that found in favour of HMRC. It was held that the construction of a vehicle is important, less so any relatively minor adaptations of the vehicle to accommodate goods use. Any modifications to change a car design to a van (goods vehicle) would have to be significant and permanent to effect a change in the status of the vehicle.
The Volkswagen Kombi and Vauxhall Vivaro vehicles involved in the appeal were found not to be sufficiently modified from their respective base car model to be considered primarily suited to the conveyance of goods or burden (but not people), so they were subject to a car benefit, not a van benefit.
The Court of Appeal also held that a multi-purpose vehicle might have no primary suitability at all – in which case, they again could not qualify as a van, absent that primary goods or burden purpose. This presented quite a serious problem for a particularly popular class of vehicle.
Double cab pickups have for many years been treated as commercial vehicles based solely on their payload capacity, which was itself derived from the long-standing VAT test: more than one tonne, and it counted as a van. But such vehicles clearly have the flexibility to carry a payload of goods and several passengers, so they were potentially caught as cars under the ‘no primary suitability’ categorisation considered in Coca-Cola.
After several months of quiet deliberation, HMRC announced in early February 2024 that it was scrapping the VAT-based approach so that, from July 2024, double-cab pickups would be subject to the standard test covered in Coca-Cola, and would typically fail as vans because they were too flexible, not having a primary purpose of carrying goods, etc. It took just one week for HMRC to change its mind and decide that the better approach would, in fact, be to bring back the old VAT-based test, now on a statutory footing, effectively to overturn that part of the Coca-Cola case.
Electricity is NOT fuel!
To be fair to HMRC, there are certain aspects of electric cars that are quite novel. One of the more unusual aspects of EV cars is charging them at home or at business premises instead of re-fuelling them.
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Readers will be aware that, since April 2018, there is a special treatment that allows employees to recharge their own EV cars at or near the employer’s premises without incurring a benefit-in-kind tax charge, in line with ITEPA 2003, s 237A.
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HMRC has had a bit of a wobble in relation to recharging EV company cars. HMRC initially appeared to accept that there was no benefit-in-kind when an employer reimburses the employee for the cost of recharging their company car where available for private use. HMRC then went through a phase of insisting that the reimbursement was taxable as earnings. HMRC saw the light (again) around September 2023, updating guidance in its Employment Income Manual (at EIM2390) to confirm it now accepts that there is no fuel benefit because electricity does not meet the definition of ‘fuel’, nor can there be any other taxable benefit because the legislation (at ITEPA 2003, s 239(2), (4)) permits no other charge to stand in the way of the standard car or fuel benefits.
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HMRC has now also provided an electricity reimbursement rate where the employer wants to cover the employee’s cost of recharging their car at home:
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The advisory electricity rate – currently 9p per business mile, for when the employee is recharging an EV company car to cover business journeys.
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Standard AMAP rates (45p per business mile for the first 10,000 business miles; 25p per business mile for any further business mileage).
The corresponding guidance for National Insurance contributions (NICs) has also been updated.
NICs and relevant motoring expenditure
HMRC lost at the Upper Tribunal in Dixon & Laing v HMRC [2023] UKUT 00155 (TCC), which considered the NICs treatment of payments connected to employee business mileage in their own vehicles. What was unusual about the employer payments here was that they were round sums, based on the employee’s seniority, and in anticipation of employees’ subsequently undertaking business mileage in their own cars.
In terms of income tax, the test would be whether any reimbursement qualified as approved mileage allowance payments, with any shortfall in reimbursement potentially, in turn, being claimable by the employee under mileage allowance relief. Readers will be familiar with the maths: the first 10,000 business miles in a tax year are eligible for reimbursement or relief at 45p per business mile, and any further mileage at 25p per business mile.
This is one of those situations where the regime for NICs did not align perfectly with income tax:
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HMRC had long argued before these cases that relief for NICs was not available for round sums paid by the employer.
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NICs are subject to the test for ‘relevant motoring expenditure’ that, while similar to income tax, allows relief against any shortfall in reimbursement compared only to 45p per business mile, regardless of total business mileage.
It follows that where employers’ and employees’ NICs have historically been accounted for on such round sum payments that HMRC has previously insisted were ineligible for treatment as relevant motoring expenditure but the Upper Tribunal has now found otherwise, then a substantial claim for overpaid NICs may now be in order.
ULEZ payments
The Ultra-Low Emission Zone charge (ULEZ) was expanded to cover all London boroughs from the end of August 2023. ULEZ charges are becoming much more widespread.
HMRC confirmed to the BBC in late August 2023 that self-employed people could claim tax relief for the charge, where incurred wholly and exclusively for the purposes of their trade.
As usual, the test for employees starts with the more stringent requirement for reimbursement or that any (net) expenditure incurred would be allowable against employment income only if incurred wholly, exclusively, and necessarily in the performance of the duties of their employment.
But it follows that ULEZ charges incurred on journeys undertaken for a wholly business purpose to a temporary place of work (and that do not amount to ordinary commuting) will be eligible for tax relief.
Conclusion
The key ruling in relation to vans that are strongly based on a car design – typically ‘mini-vans’ – is potentially quite unwelcome for employees driving such vehicles, and who will typically not have expected to get slapped for a car benefit on a vehicle that they consider to be used or usable only as a commercial vehicle.
Employees driving double-cab pickups should, however, be relieved that their status should be unchanged, in spite of the Court of Appeal’s contrary findings in Payne & Ors (Coca-Cola) v HMRC [2020] EWCA Civ 889 – subject to a promised change in the legislation.
The ULEZ tax treatments as noted above should not come as a surprise.
But the favourable outcome in Dixon & Laing v HMRC [2023] UKUT 00155 (TCC) is most welcome, and some employers and employees stand to recover quite substantial amounts from HMRC, thanks in no small part to HMRC’s long-held conviction that round sum payments would not secure relief from NICs under any circumstances.
