What is a car?

When is a car not a car? The answer could be when it is a van. Customs and Excise has clarified the definition following the growth in popularity of vehicles that blur the distinction between vans and cars.

Businesses need to know what vehicles count as cars. It is not generally possible to reclaim VAT on the purchase of a motorcar. Some company car drivers choose vans to reduce their personal income tax liability, because they are currently much less heavily taxed than cars.

The new guidance covers car-derived vans and combination vans. Many car-derived vans are clearly vans. However, some look like cars but their interior has been altered by removing the rear seats, fitting a floor panel to create a load area and replacing the side windows to the rear of the driver's seat with immovable opaque panels.

Customs says it will not view such a vehicle as a car for VAT purposes if

• The manufacturer has altered the vehicle in accordance with technical criteria specified in the Customs guidance, and
  

• The adaptations give the vehicle the functionality of a commercial vehicle and
  

• The space behind the front seats is highly unsuitable for carrying passengers.

Customs is producing a list of car-derived vans on which VAT can be deducted, subject to the normal rules. If you have or intend to buy such vehicles and you are in any doubt, you should obtain confirmation in writing from the vendor that the vehicle meets the technical criteria. Some vehicles bought before 1 October 2003 do not need to satisfy the technical criteria if they meet the other conditions.

Combination vans have the appearance of vans but can be fitted with back seats for passengers. Customs considers them to be motorcars for VAT purposes unless they have a payload of more than one tonne or the load area is big enough to make the carriage of goods the predominant use of the vehicle.

Work in progress

The way in which work in progress should be valued in the accounts of businesses that provide services is currently subject to some uncertainty following an amendment to a Financial Reporting Standard in November 2003. Accountants are interpreting the standard in different ways, ranging from valuation at cost (as was clearly the case before) to valuation at full sales price. This is no obscure theoretical issue; if work in progress were valued at sales prices, it could make a substantial difference to the turnover and taxable profit of many businesses.

The new application note to FRS5 suggests that revenue should be recognised at the price specified in the contractual arrangement, i.e. the sales price. This would result in a 'one-off' uplift to taxable profit in the year in which the new valuation is implemented. However, the standard accounting practice SSAP9 remains in place. This requires work in progress to be valued at the lower of cost and net realisable value except for long-term contracts. One view is that work in progress should be valued under SSAP9 until such time as the work is complete, at which point it should be recognised at sales price.

The Financial Reporting Committee of the Institute of Chartered Accountants in England and Wales has promised clarification but it has been slow in coming. The Inland Revenue's initial view was that the amendment might not have a significant impact on the majority of professional firms but it is now awaiting clarification from the accountancy profession before considering the matter further.

Some firms have decided to get round the uncertainty by invoicing as much work in progress as possible before the end of the financial year. Although this too results in recognition of the work at sale price rather than at cost, it is likely to speed up payment, making good business sense.