A TWO-stage change to BIK tax paid by employees on the private use of light commercial vehicles starts on April 6, but the initial softly-softly approach will be followed by a massive tax attack in 2007 if fleets fail to act.
Nine months ago the Government announced a radical reform of BIK tax paid by employees on the private use of vans provided by their employers.
But it is only now, with the first stage of a two-phase change imminent, that companies and drivers are starting to realise the potential impact on their current fleet operation and, in the case of employees, on their wallets.
The changes will kick off In April this year when employees who take their vans home, but who are not allowed any other private use, will be exempt from any benefit-in-kind tax charge, which continues to be based on a flat rate £500 (£350 for vans over four years old).
However, employees who enjoy ‘unrestricted’ private use will continue to be taxed as at present – £110 for drivers paying basic rate tax and £200 for those paying tax at 40%. In addition employers will continue to pay Class 1A National Insurance on the value of the taxable benefit.
The Government estimates that the change will take around 85% of employees who currently pay van tax out of the system.
However, as frequently occurs, the sting is in the tail, or phase two of the tax change. From April 6, 2007, the scale charge for ‘unrestricted’ private use of a van will rocket to £3,000 with an additional £500 charge for employer-provided fuel used privately.
Under these rules, basic rate taxpayers who choose to have unlimited private use of their vans will pay 22% of £3,000, equal to £660 BIK taxation from 2007 – up from the current £110 a year – and a further £110 for using company-funded fuel privately.
The equivalent charge for 40% of tax-paying van drivers will be £1,200 plus a £200 fuel charge. Employers’ Class 1A National Insurance contributions will also soar.
Talking to companies and their drivers on a daily basis, it is clear that they are worried about the consequences of the tax charges. But, by taking action now, fears can be allayed and significant tax and NIC bills avoided.
The Inland Revenue has indicated that:
Home to work is not classed as private use
Van drivers, on their way to work, can still stop at their local newsagent for a paper and a bar of chocolate without incurring a tax charge
Taking the van to do the weekly supermarket shop or to take the family on holiday will incur a private use tax charge. Therefore, with immediate effect, all light commercial vehicle fleets should review their policies and clearly advise drivers what is and is not acceptable in the eyes of the taxman with regard to private use. A failure to advise drivers could subsequently result in staff refusing to take vans home for fear of incurring a tax charge – just one mile of private use will trigger a tax bill for the year.
A refusal to take a vehicle home caused by a lack of knowledge about the tax implications is likely to result in large scale depot-based parking problems as drivers also arrange their own transport to and from work.
Such an event will not only cause parking chaos, but will also impact on the smooth operation of the business as drivers travel to their depots to collect their vans before setting off to their first job.
So, with immediate effect, companies should review the private use of vans. They should make clear to staff that home to work travel will not trigger a large tax bill and, if private journeys are to be restricted, businesses should make clear that the move is not their doing but inspired by the taxman.
Similarly, if private use is to be allowed to continue the tax charge that it will result in both from April with a further rise in 2007 should be made abundantly clear to staff, who should be consulted on the issue.
Educating drivers now and putting revised policies in place will enable shock BIK tax bills to be avoided by light commercial vehicle drivers.