How Does HMRC Classify Commercial Vehicles? Tax Implications for Your Business

By Jen White 24 June 2025

One of HMRC’s most frequently misunderstood classifications is whether a vehicle is classed as a ‘van’ (commercial vehicle) or a car for tax purposes. Misidentifying a vehicle for tax purposes can have significant financial implications for UK businesses and their employees.

The three key areas impacted by a vehicle’s classification include benefit in Kind (BIK), Capital Allowances, and VAT. Misclassification impacts operating costs, National Insurance Contributions (NIC), and may have costly penalties.

In 2020, £1.2 million in back taxes and penalties were paid to HMRC for the misclassification of vehicles by Coca-Cola. The landmark case set a precedent for HMRC to challenge similar classifications, increasing penalties for businesses of all sizes and sectors.

This article was written in partnership with DS Burge & Co, an experienced chartered accountancy firm who have contributed their expertise in tax, compliance, and business planning to support the commercial guidance provided.

In collaboration, we will explore the definitions of a vehicle by HMRC, highlight recent policy changes, and explore the tax benefits for your business when choosing the right vehicle.

Classification of Vehicles and Company Tax Relief

It may seem trivial to consider a vehicle’s classification; the distinction between a car and a van should be straightforward. However, with many businesses now opting for the versatility of a multi-purpose vehicle, particularly given the rise in ULEZ and town centre congestion charges, classification can seem complex.

With considerable savings available to employees and business owners when choosing a van over a car, it is important to distinguish between them correctly and understand their different tax statuses.

HMRC Classification Van vs Car

HMRC’s classification hinges upon the construction and primary purpose of the vehicle, not how it is used. Just because a ‘car’ is used for transporting goods, it does not legally define the vehicle as a ‘van’ for tax purposes. The legal framework and definitions for distinguishing between a car and a van can be found in the Income Tax Act 2003 (ITEPA 2003).

A Van (Commercial Vehicle) is defined by HMRC as: “a mechanically propelled road vehicle” which:

Has a ‘design weight’ not exceeding 3,500 kilograms (3.5 tonnes).
Is not a motorcycle.
Is primarily constructed or adapted for transporting goods or burden loads.

Note: The vehicle’s structure must be primarily for carrying cargo. Typical indicators include a loading area, a lack of side windows behind the driver, and seating limited to the front row.

HMRC defines a Car as: “a mechanically propelled road vehicle” which:

Is not a motorcycle.
Constructed primarily for carrying passengers.

Finance Act 2024: Changes to Vehicle Classification

The Finance Act 2024 (Section 25) set about reshaping the classification of a commercial vehicle, creating a strict ‘construction over use’ approach. These legislative changes were partly driven by the 2020 Coca-Cola v HMRC tax case, which challenged the dual-purpose use of vehicles within the firm. Employees were provided with VW Transporter Kombi vans, which featured removable rear seats but were primarily passenger vehicles.

The court appeal ruled in favour of HMRC, that the vehicle’s design prioritised passenger conveyance and should not have been classified by Coca-Cola as a commercial vehicle. The firm was ordered to pay £1.2m in back taxes and penalties to HMRC for misclassification.

Legislation was implemented to provide greater transparency and mitigate against future misclassification by firms of all sizes. The legislative changes included:

Irreversible Modifications:

The removal of seats or windows must be permanent to qualify as a van.
The vehicle must be re-registered as N1 status with the DVLA.

Payload Testing:

The cargo areas must exceed 60% of the total interior volume.

Expanded Weight Calculation:

The design weight must remain under 3,500 kilograms but now include all post-manufacture additions. This includes tool racks, storage units and any reinforcements.

Double Cab Pick Up Changes

As confirmed in the 2024 Autumn Statement, HMRC will treat most double-cab pick-ups as cars, not vans, for tax purposes from 1 April 2025 (for Corporation Tax) and 6 April 2025 (for Income Tax and Benefit-in-Kind).

Previously, double-cab pickups with a payload of one tonne or more, such as the Ford Ranger, Toyota Hilux, and Nissan Navara, were classed as vans, allowing businesses to benefit from van-related capital allowances and lower benefit-in-kind (BIK) charges.

Under the new rules, classification is now based on construction, not usage. Where a vehicle is equally suited to carrying passengers and goods, such as having a second row of seats or interior features designed for comfort, it is now likely to be treated as a car. This reclassification may result in higher tax liabilities for businesses and employees alike.

Implications for your Business

Businesses acquiring a double-cab pickup on or after 6 April 2025 must treat the vehicle as a car for capital allowances and benefit-in-kind (BIK) purposes, rather than as a commercial vehicle (van).

Transitional arrangements apply where the double-cab pickup was purchased, leased, or ordered under a binding contract before 6 April 2025. In these cases, the previous van treatment can continue to apply until the earlier of:

the vehicle being sold or disposed of,
the lease ending, or
5 April 2029.

Using an SUV as a Van

While changes to the double-cab rules have resulted in numerous SUVs being exempt from commercial status, some SUVs have been specifically engineered to meet the “goods vehicle” criteria.

The KGM Rexton Commercial vehicle is a practical commercial SUV that combines the premium comfort and technology of a sophisticated 4×4 with the practicality of a van. It offers a 2,200L boot capacity, a selectable 4×4 with a low ratio, and a towing capacity of 3,500 kg.

The Rexton has a Euro 6 diesel engine providing 32.6MPG and is fully ULEZ compliant. Even more importantly, it is classified as a commercial vehicle, and as such, qualifies for:

100% Annual Investment Allowance (AIA) or Annual Capital Write Down
Full VAT Reclaim
DVLA registered as a light goods vehicle (N1), resulting in lower Road Tax (VED)
£0 BIK (If private use only) or £4,020 (HMRC 2025/26) flat-rate benefit-in-kind charge for private use (VS £14,000+ for an equivalent car)

Employer Tax Benefits for Commercial Vehicles

The classification of a vehicle as a van (commercial vehicle) offers substantial tax savings to both the employer and employee. These tax benefits include:

Income Tax Relief

Commercial vehicles (vans) qualify for accelerated capital allowances that are unavailable to cars. These benefits include:

Annual Investment Allowance (AIA): For vans purchased outright, up to £1 million can be written off annually in one go. This enables a business to reduce taxable profits substantially.
Capital Write Down: For amounts that exceed the AIA allowance or vans not purchased outright, an annual deduction of 18% can be made to reduce taxable profits.
Full Expensing: Offers 100% first-year relief for leased commercial vehicles, abolished for cars except pure EVs.

VAT Reclaim Farmwork

Unlike company cars, commercial vehicles permit 100% VAT recovery on purchase, lease, and modification costs, assuming business use exceeds 50%.

Incidental private use (i.e. commuting or brief private trips) does not invalidate claims, provided businesses maintain verifiable mileage logs demonstrating a 50% business use. This represents a 20% saving on the acquisition cost of a commercial vehicle, providing a substantial cost saving.

HMRC only allows VAT on fuel to be reclaimed for business journeys. A log detailing private vs. business travel is important. For example, if a business’s annual fuel bill is £2,400 and 70% of travel is for business use, £336 in VAT could be reclaimed.

Operational Cost Deductions

All day-to-day running expenses for commercial vehicles attract full tax relief, significantly reducing net operating costs. These deductible costs include:

Fuel/Charging: 100% income tax deductible with proportional VAT reclaims (EVs incur no ‘fuel benefit’ charge).
Repairs and maintenance (R&M): Including vehicle servicing, part replacement, tyres, and MOT costs.
Insurance: Business policy premiums are fully deductible.
Congestion/ULEZ Charges: ULEZ, CAZ, and Congestion Zone charges qualify for relief
Toll Fees: For business travel only.

Allowances for Zero Emission Vehicles

Electric and hydrogen vehicles have exceptional tax advantages that significantly reduce ownership costs. The First-Year Allowance (FYA) permits businesses to deduct 100% of the purchase price of new zero-emission vans or cars against taxable profits within the year of purchase.

There is no cap to the FYA allowance, and it can be used as an alternative to the Annual Investment Allowance (AIA), allowing fuel-based commercial vehicles in the fleet to be used under the AIA scheme.

For company cars that generate benefit-in-kind (BIK), electric vehicles attract the lowest BIK rates of just 3%, dramatically reducing the cost of private use for employees and NIC payments for employers.

Infrastructure investments further enhance savings. Businesses may reclaim 100% VAT on workplace charging installations, and electricity costs incur no “fuel benefit” charges, even with free employee charging.

DSB: For a full breakdown of how business car purchases are treated for tax purposes – including how VAT works on company vehicles – see our guide to Business Car Finance.

TWW: For a full breakdown of how business car purchases are treated for tax purposes – including how VAT works on company vehicles – read DS Burge & Co’s guide to Business Car Finance.

TW White and Sons offer a wide variety of low BIK zero-emission vehicles, including the Suzuki E-Vitara and the KGM Torres EVX. With both vehicles offering over 200 miles of range, reduced upkeep and substantial tax savings, exploring an electric company vehicle offers a host of benefits for both employers and employees.

Key Factors Determining Company Car Tax and Benefit in Kind

When a vehicle is classed as a car (not a commercial van), three critical elements dictate the tax liabilities for both employers and employees. These tax charges include benefit-in-kind (BIK) and/or luxury surcharge for the employer and a Class 1A National Insurance (NI) liability for the employer. The tax costs can be substantial, and it is therefore important to understand the factors determining company car tax for accurate budgeting. These factors include:

The Car’s List Price (P11D Value):

This includes the manufacturer’s list price, delivery charges, VAT and any optional extras fitted before delivery. It excludes the annual vehicle duty (Road Tax) and the first registration fee.

Note: Commercial vehicles avoid the P11D value for the calculation of BIK. Instead, a flat rate of £4,020 (2025/26) is charged regardless of value or emissions.

Luxury Car Surcharge:

Introduced in 2017, the Expensive Car Supplement (ECS) imposes an additional Vehicle Excise Duty (VED) of £425 annually for the first five years on any vehicle with a list price that exceeds £40,000. As of 1st April 2025, this has been extended to include electric vehicles.

This surcharge is paid by the registered keeper of the vehicle (typically the employer or leasing provider) and does not affect the employee’s Benefit-in-Kind (BIK) calculation.

CO2 Emissions:

A vehicle’s carbon dioxide output directly determines the Benefit-in-Kind (BIK) percentage rate that is applied to the vehicle’s list price (P11D value). The lower the emissions, the lower the BIK rate that is applied to the car’s P11D value. The scale for 2025/26 ranges from 3% for EVs up to 37% for the highest-emission vehicles. The lower threshold for EVs was increased in 2025/26 from 2% to 3%.

Diesel vehicles not RDE2 compliant receive a +4% surcharge; however, RDE2 became mandatory for any diesel vehicle registered after January 2021. Hybrid vehicles receive a discount based on their electrical range. For the full table of BIK charges based on CO2, you can read DS Burge & Co: Company Car Tax Guide 2025.

Fuel Type:

HMRC imposes a fuel benefit charge when employers provide free or subsidised fuel for private journeys in a company vehicle. This rate is set for petrol and diesel vehicles at £28,200 (2025/26) x BIK rate (defined by CO2). For EVs there is no fuel benefit charge, while hybrids are charged the lower BIK rate but still subject to the fuel multiplier charge.

If no private fuel agreement exists, and an employee reimburses the company for any fuel used for private use, the charge is avoided. For private purposes, commercial vehicles (vans) pay an annual flat fee of £769 (2025/26).

The Employee’s Income Tax Band:

When an employee uses a company vehicle for private use, a total benefit-in-kind charge must be calculated, considering any fuel or luxury car charges. The final BIK value is then added to the employee’s salary and is taxed at their marginal income rate. For instance, an individual earning £49,000 with a BIK of £10,000 would now have a taxable salary of £59,000.

It is important to understand the UK tax bands. For some individuals, adding BIK to their annual salaries could push them into a higher tax bracket, and their final tax payment would be based on that bracket.

Considering the example above, this final BIK payment would be based on 40% income tax, despite their original salary of £49,000 falling into the basic 20% band. Read DS Burge & Co’s UK Tax Band 2025/26 guide for the latest tax rates.

The addition of BIK to the employee’s taxable income increases the employer’s Class 1A National Insurance (NIC) obligations. This is paid annually via the P11D return and is calculated based on the total BIK amount. For instance, £10,000 BIK x 13.8% NIC = £1,380 additional NIC obligation for the employer.

Real-World Example of Company Car Tax and BIK:

A vehicle with a P11D value of £35,000 with a BIK rate of 20% (based on Co2), with free private fuel:

Car BIK: £35,000 x 20% = £7,000

Fuel Benefit: £28,200 x 20% = £5,640

Total Taxable Benefit = £12,640

Employee Tax (40%): £12,640 x 40% = £5,056

Total Benefit-in-Kind = £5,056

Understanding the tax implications of a company car can be complex, with numerous variables. For more information, read DS Burge & Co’s Company Car Tax Guide 2025, which provides detailed guidance on how company car tax works, deductibles and alternatives.

Conclusion

HMRC’s rules for classifying vehicles as cars or vans are strict and complex, and inaccurate misclassification can result in significant financial consequences.

With various vehicle options available, each presenting unique advantages, correctly classifying and utilising a genuine commercial vehicle could offer 100% tax relief (AIA), full VAT recovery and minimise benefit-in-kind charges.

With significant benefit-in-kind incentives for electric and hybrid vehicles and no fuel benefit charges for electricity costs, many businesses opt for hybrid or electric cars for the additional private benefits they offer.

At TW White and Sons, we offer a range of practical, tax-efficient commercial vehicles, including low BIK zero-emission models suitable for business use. With over six dealerships and expert advice on hand, we help companies find the right fit for their fleet needs. Explore the range or get in touch.

The New Mazda 6e Revealed

The Mazda 6e is Mazda’s newly revealed all-electric mid-size vehicle, and it marks the brand’s second foray into fully electric cars after the Mazda MX-30. Debuting at the Brussels Motor Show in January 2025, the Mazda 6e brings familiar Mazda styling and outstanding electric technology. This sleek liftback sedan offers long-range capability – up to […]

News