What Is Classed As a Commercial Vehicle for UK Tax Purposes

When it comes to vehicle taxation in the UK, it is crucial for businesses to understand the distinction between commercial and private vehicles. The classification of a vehicle not only affects tax and insurance but can also determine the benefits that may be available to both employees and employers. In this article, we’ll cover the key requirements for commercial vehicles, address the tax implications and take a look at the finance options available to those who want to acquire a commercial vehicle.

Defining a Commercial Vehicle - HMRC

A commercial vehicle, from a UK tax perspective, is generally a vehicle used for business purposes, such as transporting goods, carrying equipment, or providing services. However, specific criteria provided by HM Revenue & Customs (HMRC) clarifies which vehicles fall under this category in order to gain specific tax benefits; for example:

• The vehicle must have a gross weight of 3.5 tonnes,
• Be able to haul at least one tonne of cargo, and
• Be used strictly for business purposes only.

If a commercial vehicle is used for personal trips, it will be subjected to benefit-in-kind taxes (explained later on).

It is important to note that certain cars, such as taxis, can be classed as commercial vehicles, although they do not gain the same tax benefits as vans and van-related vehicles. This is because commercial cars are able to supply the movement of people, but some of HMRC’s main tax benefits apply only to vehicles which facilitate the movement of goods.

A car-derived van has slightly different requirements. To be classed as a commercial vehicle, it must:

• Have a laden gross weight of 2 tonnes,
• Be built on a platform designed to build vans by the same manufacturer, and
• Not have back seats or windows. If any windows need to exist, they must be either tinted or opaque.
• Only feature loading/cargo areas in the rear of the vehicle, such as the storage area in a van

Key Requirements for Commercial Vehicles

As well as the specific weights, there are other key requirements by HMRC which must be met in order for a vehicle to be classified as commercial and receive a greater number of tax benefits. These include:

• Vehicle Type: The vehicles which HMRC define as being commercial include:
  • Vans
  • Lorries
  • Pickup trucks
  • Certain 4x4s used for business purposes
• Use of the Vehicle: Is the primary purpose of the vehicle any of the following?
  • To transport goods or equipment
  • To provide services (e.g., delivery, repair)
  • To carry tools and materials for tradespeople
• Seating and Design: Vehicles designed with a load area, limited seating (usually up to three seats), and no rear windows are more likely to be classified as commercial to gain tax benefits. Dual-purpose vehicles, which can serve both commercial and personal use, might face more scrutiny.

If you are unsure if your vehicle is classified as a commercial vehicle, speak with your accountant or contact HMRC directly.

Tax Implications

There are different taxes and allowances available for commercial vehicles, as opposed to private vehicles. These include:

• Capital allowances
• Benefits-in-kind
• VAT relief

Capital Allowances

Businesses can claim capital allowances on commercial vehicles, allowing them to deduct a portion of the vehicle's cost from their profits before calculating tax, depending on the type of allowance. Vans qualify under the annual investment allowance (AIA), allowing companies to claim tax relief on “plant and machinery” goods (certain items used for operations within a business). The full value of a qualifying item can be deducted from your profits before tax. The annual investment allowance can be claimed on most plant and machinery goods up to £1 million.

If you don’t want to claim the full cost of a qualifying vehicle, you have the option of claiming a writing down allowance instead. This type of allowance lets you deduct a percentage of the total value of a certain item from your profits each year, such as a commercial pickup truck.

In some cases, your commercial vehicle may qualify for a 100% first year allowance (also known as “enhanced capital allowances”) on top of AIA, as long as both are not claimed for the same expenditure. Only new and unused vehicles can be claimed for, and they must be any of the following:

• Electric cars or cars with zero CO2 emissions
• Gas, biogas and hydrogen refuelling equipment
• Plant and machinery for gas refuelling stations
• Zero-emission goods vehicles
• Equipment for electric vehicle (EV) charging points
• Plant and machinery for use by companies in a special tax site in “UK Freeports” or “Investment Zones”

Benefits-In-Kind

If an employer provides a commercial vehicle for private use, it can attract a benefit-in-kind (BIK) tax charge. The rules are different and often more favourable for vans that are also used for personal use compared to commercial cars, with lower rates applied. If your van is only used for business purposes, you don’t have to pay any BIK, since it is not classed as a “business perk”.

The BIK rate for a van not strictly for commercial usage is set at a flat rate of £3,960, until the end of the tax year in 2025/26. All vans that are also used privately as well as commercially need to be reported to HMRC. Those who are self-employed (sole traders) can use a van for personal journeys without being liable for BIK tax, but those using a van provided by an employer will be liable for BIK tax if it is used for private purposes outside of the working day.

You may be wondering, are there any exceptions to this? In short, yes. HMRC allows slight flexibility in what classes as a private journey, known as “insignificant private use”, which includes journeys to and from work, and small errands such as heading to a supermarket on the way home from work. Anything more significant than these will trigger the BIK tax liabilities.

VAT Relief

For VAT-registered businesses, the VAT paid on the purchase of a commercial vehicle can often be reclaimed. However, this is generally not possible for cars unless they are used exclusively for business purposes, and the amount you can claim for commercial vans may need to be adjusted if the van is also used for private purposes.

There is often confusion surrounding dual-usage vehicles (such as vans used for commercial and private use), so keeping a record of private journeys taken with a commercial vehicle is essential to comply with the correct tax regulations. Fuel receipts and mileage counts are the most accurate ways of doing so.

What Tax Category Do Commercial Vehicles Fall Into?

Commercial vehicles pay reduced taxes, and all commercial vehicles used specifically for business purposes fall into the same tax category (TC39), to ensure an easier calculation. All light commercial vehicles (LCVs), such as vans, pay a flat rate for road tax of £335 for a single 12-month payment. This is known as vehicle excise duty (VED).

What Benefits Do Commercial Vehicles Provide a Business?

Having a commercial vehicle for your business brings several benefits - not just surrounding tax relief. These include:

• Operational Efficiency: Commercial vehicles are designed to meet specific business needs, such as transporting goods, equipment, and tools. This makes operations more efficient and streamlined.
• Cost Savings: Modern commercial vehicles are often equipped with fuel-efficient engines, leading to lower fuel costs over time. They are also built to withstand heavy use and often require less frequent maintenance, reducing overall costs.
• Brand Visibility and Marketing: A branded commercial vehicle serves as a moving billboard for a business. It increases brand visibility and awareness as it travels, reaching a wide audience without incurring additional advertising costs.
• Environmental Benefits: Many manufacturers now offer commercial vehicles with eco-friendly technologies, such as electric or hybrid engines. These vehicles produce fewer emissions, contributing to a business’s sustainability goals.
• Fuel and Tax Advantages: The tax benefits for commercial vehicles, discussed throughout this article, such as VAT relief, capital allowances and reduced BIK, offer unique advantages compared to private vehicles. There are also specific rules concerning fuel provided for commercial vehicles, with potential tax reclaims or reduced charges, depending on the vehicle’s use.

Company Car or Commercial Vehicle?

Many people confuse company cars with commercial vehicles. Company cars are given to employees as part of the role and incur a benefit-in-kind charge, which is applied as a cash equivalent value to the employee’s taxable earnings.

Commercial vehicles are usually strictly for business use, but if they’re able to be dual-used, they will face reductions in tax benefits such as VAT relief and BIK.

Electric Commercial Vehicles - The Future

“Green” electric vehicles are the future of commercially-used vans and cars, offering numerous tax benefits on top of existing reliefs, such as enhanced capital allowances (ECA) which apply to new zero-emission goods vehicles. The prospect of 100% tax relief with no annual limit is attractive for businesses, especially those who have environmental quotas to fulfil, so a rise in more sustainable commercial vehicles is expected.

Finance and Insurance Options for Commercial Vehicles

Investing in a commercial vehicle can be a significant expense for businesses, but there are various commercial vehicle financing and insurance options available to help manage the costs. Understanding these options allows businesses to make informed decisions that best suit their financial situations and operational needs. These include:

Finance Options

• Hire Purchase (HP): Hire Purchase is a popular option of asset finance where the business pays an initial deposit followed by fixed monthly payments over an agreed period. The business owns the vehicle outright after the final payment.
• Finance Lease: With a finance lease, the business rents the vehicle for an agreed period. At the end of the lease, the business can either continue leasing, sell the vehicle, or return it. The leasing company retains ownership, but the business bears the risks and rewards of ownership.
• Operating Lease: An operating lease involves renting the vehicle for a shorter period, typically less than the vehicle’s useful life. Maintenance and servicing are often included. The leasing company owns the vehicle, and it’s returned at the end of the lease term. Alongside finance leasing, this is another form of asset finance.
• Business Loans: A business loan can be used to purchase a commercial vehicle outright, with the business having full ownership of the vehicle from the start to experience capital allowance tax benefits (if qualified).

Insurance Options

• Third-Party Only: The minimum legal requirement for commercial vehicles and the most affordable option, this insurance option covers liability for injury or damage to third parties only.
• Third-Party, Fire, and Theft: This insurance method covers damage to third parties and their property, and also protects against fire and theft of the vehicle, providing essential coverage for significant risks.
• Comprehensive Cover: This protects against damage to the commercial vehicle, theft, fire, vandalism, and third-party liability. Comprehensive coverage can sometimes include additional services such as breakdown coverage.
• Fleet Insurance: A single policy that covers multiple vehicles owned by a business, fleet insurance simplifies administration with one renewal date and one premium, bringing potential cost savings through bulk coverage.
• Public Liability: This insurance protects against claims from third parties for injury or property damage caused by business operations involving the vehicle. This is essential for businesses interacting with the public, covering legal fees and compensation claims.

Bespoke Finance Solutions Tailored for Commercial Vehicles

If you’re wondering how to finance a new van or commercial vehicle purchase for your business, Union Business Finance provides same-day business van finance with rates from as low as 7%! Get in touch with us to discuss how we can help you.

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