From April 6, the benefit-in-kind tax charge for private use will rocket from £500 to £3,000. In addition, there will also be a taxable benefit charge of £500 for providing free fuel for private use.
Employees will pay tax on the charge at their basic rate, either 22% or 40%, but the cost doesn’t stop there, as the employer also pays Class 1A National Insurance Contributions on the charge.
For the majority of fleets, this shouldn’t be an issue, as the Government changed van tax rules last year so that the majority of van drivers pay no tax at all, even if they commute to and from work in their vehicles.
However, this is only if the employer can prove that staff do not really use the vans for other ‘significant’ private use.
Therefore, the correct systems need to be put in place by van fleet operators so they can prove to HM Revenue & Customs inspectors that employees should be exempt from the tax altogether. Many fleets are struggling to understand the limits of private use, as the term ‘significant’ provides no specific guidance.
According to recent research, almost a quarter of companies operating van fleets are unaware of the 600% increase in the benefit-in-kind tax charge.
Vehicle tracking specialist Navman Wireless UK found that 23% of companies questioned were not aware of the changes.
The survey also revealed that of those that are aware of the increase, around a third (32%) are failing to take steps to provide evidence of when, where and how a vehicle is used.
Tony Neill, vice-president Europe, Middle East and Africa at Navman, said: ‘The onus is on employers to provide proof of use but these statistics suggest that many companies are ill-prepared for the forthcoming tax rise.’
Vehicle tracking companies, such as Navman, believe they have the answer, but a range of other solutions are also available, from ensuring drivers correctly fill in mileage returns to on-board systems that require drivers in input whether a journey is business or private before starting the engine.
Experts say there is little excuse for companies to be surprised by the changes, particularly as there has been a lead time of more than a year to ensure they can prepare.
The introduction of the private mileage limits on vans took effect in April 2006, but the £500 tax charge that has been in place since 1992 was continued for a final year.
After 12 months of preparation time the Government is now finalising the plan with the tax hike. This increase is principally designed to capture drivers who have switched out of company cars into double-cab pick-ups, which are classed as commercial vehicles. By doing so, they have been able to slash their tax bills.
But even a £3,000 benefit-in-kind tax charge may not be enough to put off drivers of double-cabs, as the tax is equivalent to a 1.6-litre lower-medium hatchback costing £15,000.
So for drivers in some top-of-the- range double-cabs costing well in excess of £25,000 it still represents a bargain.
But for traditional LCV fleets, the changes could present real problems. One fleet manager, who asked not to be named, said his fleet of 1,000 vans would be heavily hit by the changes, as drivers were reluctant to give up private use but didn’t want to pay more tax.
In addition, if the situation isn’t resolved, the firm’s Class 1A National Insurance bill could rocket from £64,000 to £384,000.
Officials at HMRC are urging fleets to discuss any problems with them directly and see if they can reach an amicable solution.
But one thing is certain – for some fleets, the new financial year is going to bring some very expensive problems.
VAN TAX CHANGE SUMMARY
From April 6, 2007, employees who have ‘signficant private use’ of a vehicle will pay tax on a benefit-in-kind charge of £3,000.
There will also be a £500 benefit-in-kind tax charge if the employee receives free employer-provided fuel for private use.
Employers will also pay Class 1A National Insurance Contributions on the tax charge.
Drivers will escape any charges if they have the van mainly for business travel, and any private use other than for journeys to and from work is insignificant.
Home-to-work journeys are still considered to be private use, but the new rules allow employees to use their vans for those journeys without paying tax.
Where there is no tax charge on the van there will be no Class 1A charge either.
The word ‘insignificant’ is not defined, so it takes its normal English meaning. For example, the New Oxford English Dictionary defines it as, ‘too small or unimportant to be worth consideration’.
Examples of insignificant use would be an employee who takes an old mattress or other rubbish to the tip once or twice a year, regularly makes a slight detour to stop at a newsagent on the way to work and calls at the dentist on his way home.
Examples of use which is NOT insignificant are an employee who uses the van to do the supermarket shopping each week, takes the van away on a week’s holiday and uses the van outside of work for social activities.