Emergency vehicles and tax

12 March 2018

This article was featured in the April 2018 issue of the magazine.

Duncan Groves, director and head of employment taxes at PSTAX, dispels some myths and clarifies some complex points

Readers of the PSTAX pages will remember more than one article on how emergency vehicles should be subject to taxation, referencing a change to legislation that took effect from April 2017. This latest offering reflects the fact there are several questions for which no consistent answer appears available; however, expect a fourth and final article in due course.


Should fuel, motor insurance, and the costs of modifying the vehicle be included in the ‘use of assets’ benefit calculation in the P11D return?

Tax legislation requires an employer to include any costs that are ‘in connection with’ the provision of the benefit. Therefore, in theory, all the above listed costs should be included; however, there are technical arguments which, if successful with HM Revenue & Customs (HMRC), could take the respective costs out of the equation. For example, in relation to the modification of the vehicle, it would be reasonable to view these costs as wholly necessary for the required business use and not in connection with the provision of a benefit. After all, an emergency services officer could not derive a personal benefit from the fitting of ‘blues and twos’ unless they dare to turn them on when running late for a date with a loved one...and such use would be strictly prohibited, of course. 

In recent discussions, HMRC have taken a reasonable view that these costs can be excluded, so long as there is no attempt to seek a lower ‘market value’ as a result of the modifications.

In terms of the motor insurance costs, it would be possible, in most circumstances, to identify a ‘per vehicle’ annual cost and therefore to include this in the calculation. However, some insurance policies appear to include an entire fleet; since the fleet would be largely made up of marked vehicles, vans and larger vehicles such as fire engines or ambulances, it might be possible to treat the costs connected with the ‘assets’ as below de minimis, based on the principle of ‘marginal cost’. HMRC has never accepted outright the principle of marginal cost, other than when applied to in-house benefits, and so this argument would be one to put to HMRC on a case by case basis and would ultimately rely on a common-sense application of the law.

The provision of fuel is the most contentious point. Prior to April 2017, emergency services would commonly include employer-provided fuel in the P11D return calculation, but the new legislation prohibits any apportionment of the benefit by reference to business use. Consequently, an officer would have to pay tax from April 2017 on both the business and private use of the car, to include the costs connected with the car’s provision. In recent discussions with HMRC on this point, we have conceded that, for fuel provided by employer pumps or via fuel cards, the P11D calculation should correctly include this cost. However, HMRC is currently maintaining that fuel costs met personally by officers should be similarly included and we disagree in terms of both application of the law and common sense. Encouragingly, HMRC has volunteered to take the apparent inequity of this position to policy colleagues; and so we await more positive news.


...an emergency services officer could not derive a personal benefit from the fitting of ‘blues and twos’... 


What is the correct steps when calculating the benefit of use of an asset?

Just when we thought this question had been resolved following numerous employer compliance visits, it has re-appeared due to a HMRC guidance document issued in December 2017. It refers to the benefit in kind calculation for 2016/17 and prior years and clearly states that the business use apportionment should follow the ‘making good’ reduction, not precede it.

We challenged HMRC on this, and their response was very interesting. While clarifying that, for class 1A National Insurance contributions (NICs), the correct process would have been to ignore the ‘business apportionment’ step and simply apply the class 1A charge to the cash equivalent after taking off the officer contribution, they also confirmed that, for tax purposes, their example in the guidance was correct.

It was pointed out to HMRC that hundreds, possibly thousands, of officers’ tax codes would need to be amended to take account of this as a large majority of emergency service organisations have heeded previous HMRC advice when completing P11D returns in respect of these benefits. This prompted HMRC to suggest that our concerns be fed back to policy colleagues to consider the matter further. We await developments.


What mileage rate can I pay to officers using privately owned emergency vehicles?

The April 2017 legislative changes have, somewhat ironically, driven employers and officers to consider whether there are better/more tax-effective ways to provide on-call emergency response cover. Although most emergency services organisations have been looking to move away from use of personally owned cars to provided vehicles, there now seems some appetite to reverse this. This has led PSTAX to consider whether ‘AMAPs’ (authorised mileage allowance payments) are the appropriate way to reimburse an officer when driving their emergency vehicle (i.e. one fitted with blues and twos) on business.

Our research suggests that the AMAPs legislation does not, in fact, apply to such vehicles since they are not ‘of a type’ that may be used on the roads. 

So, what are the implications arising from this? Logically, if the average cost of driving a car is considered by HMRC to be 45p per mile (reduced to 25p after 10,000 miles), then the cost attributable to driving an operational vehicle fitted with and carrying heavy equipment, will be considerably more. We are therefore inclined to think that many officers would have a strong case for calculating their individual motoring costs and using this as a basis for claiming tax relief.

Where the employer has used the AMAPs rates as a ‘benchmark’ for payment of business mileage, we consider that this would be acceptable to HMRC. However, some employers would have paid, and might still be paying, at rates well below 45p. So, the potential for claiming tax relief could be considerable. This position is in stark contrast to the taxation of cars that are provided to officers for both business and private use.


...actual day-to-day commuting becomes ‘permitted use’...


Are there better/more tax-friendly options for the provision of emergency vehicles?

As a result of the use-of-assets rule changes, many organisations, particularly fire and rescue services, have started to apply the emergency vehicle exemption – which dates back to 2003 – to their provided and lease vehicles.

The two key conditions that need to be satisfied relate to ‘permitted’ private use in the context of a general prohibition of private use. This is not a contradiction as the law clearly allows for both private use while on call and on-call commuting use. But what do these terms mean?

Our extensive discussions with HMRC have informed our view as to the way in which the exemption can work. In relation to ‘freedom of movement’ mileage (as it tends to be known in the fire service), this qualifies as ‘permitted use’ under condition four so long as the officer is on call and able to return to the geographical area within a reasonable timeframe, e.g. sixty minutes.

As regards ordinary commuting, HMRC will accept that an officer may have a requirement to attend an emergency even when not on an on-call rota when they have booked on duty while in their official vehicle. Most emergency services now rely on additional cover from officers who are ‘nearest’ to an emergency, and so it is reasonably common for officers using their provided vehicle for an ordinary commuting journey to be diverted elsewhere. So, as a result of having a policy which requires officers potentially to respond while commuting, the actual day-to-day commuting becomes ‘permitted use’ under the terms of the exemption.

Although officers who have had unlimited private use of their lease cars might prefer not to ‘sign up’ for the exemption, the financial implications of sticking with their taxable ‘assets’ will, at the very least, provide food for thought. 

On a final, and slightly playful, note, I wonder whether HMRC ever considered that emergency vehicles would have been so affected by the new legislation. Perhaps someone at HMRC might even now be pondering whether it would be easier just to amend the ‘company car’ rules so that cars fitted with ‘blues and twos’ are caught by them? Now that would be ‘simplification of tax’ at its most controversial level.