Company Pool Cars Explained: Conditions, Rules, and Pitfalls
For a vehicle to qualify as a company ‘pool car’, several strict conditions must be met. As these rules offer a complete exemption from benefit-in-kind (BiK) tax charges, it is no surprise that HM Revenue & Customs (HMRC) enforces them rigorously. In the event of an enquiry, HMRC will almost certainly examine the company’s use of cars and vans, often making this one of their first areas of focus.
The cost of getting it wrong
When it comes to pool cars, the amount of tax and National Insurance at stake can be very high:
- The annual BiK charge can be up to 37% of the retail price of the car when new (this is still the case when the car is second-hand); and
- There can also be a fuel benefit on top.
If, during an enquiry, HMRC determines that all the conditions below are not met for the vehicle to be a pool car, they will apply a backdated BiK charge (i.e,. they will go back more than a year) in respect of private use of the individuals who used the car. This means HMRC would seek underpaid PAYE and National Insurance. Interest and penalties would then be applied.
In addition, penalties for non-submission of a P11D(b) could occur at £100 per every fifty employees (or part of 50) per month or part month.
When is a company car a pool car?
HMRC requires five key conditions to be satisfied for a company car to qualify as a pool car. There is a burden of proof on you as an employer to be able to demonstrate that all five conditions for the car to be a pooled vehicle have been met.
HMRC’s guidance (480: Chapter 15) sets out an extract from the tax legislation. This states that a car only qualifies as a pool car if all the following conditions are satisfied.
- It is available to, and actually used by, more than one employee;
- It is made available, in the case of each of those employees, by reason of their employment;
- It is not ordinarily used by one of them to the exclusion of the others;
- Any private use by an employee is merely incidental to their business use of it; and
- It is not normally kept overnight on or near the residence of any of the employees unless it is kept on premises occupied by the provider of the car.
A closer look at the five conditions
The first condition is quite self-explanatory and the second condition is satisfied in most cases if the user is an employee.
For the third condition, it is highly recommended that a vehicle log (see below) is maintained where the vehicle is “logged out” for use, showing who is using the vehicle. Also, careful wording in staff handbooks and other contractual agreements is recommended. This will help provide evidence of the third condition being met.
In regard to the fourth condition, examples HMRC provide where private use might be accepted as ‘merely incidental’ to business use are as follows:
- An employee staying away from home overnight because of a business trip may use the car to go out for a meal in the evening: even though this journey is not ‘necessary’ in the tax sense, it may still be regarded as ‘merely incidental’ to the main business journey and to the overnight stay; and
- Where an employee takes a car home to make an early start on a business journey the following morning. This will be accepted as merely incidental if the ‘business journey could not reasonably be undertaken the next day starting from the normal place of work’. However, if it happens frequently, then the car will fail to be treated as a pooled car because it would contravene the ‘not normally kept overnight’ rule.
Using the car for, say, a regular home shop would not be acceptable, nor would using the car for an annual holiday, even if the private mileage was very low compared to the business miles travelled in the year.
This is because HMRC makes a distinction between private use of the car which is ‘independent of the employee’s business use of the car’ and private use which ‘follows from the business use’. The former does not meet condition four, while the latter may be acceptable.
The fifth condition can cause issues. According to the HMRC Employment Income Manual, they accept that a car is not normally kept overnight if the total number of nights on which it is taken home by employees, for whatever reason, is less than 60% (as a rule of thumb) of the total number of nights in the period under review. Note ,however, that if a car is taken home often enough to approach the 60% limit, it is unlikely that all the home-to-work journeys will satisfy the ‘merely incidental’ test and therefore that condition will fail.
Further considerations
Proper documentation of the vehicle’s usage is invaluable when it comes to demonstrating that a company car meets HMRC’s pool car criteria.
It is recommended that you, as a minimum, maintain:
- Business mileage records: detailing the miles travelled and reconciled to the mileometer regularly. This record should show who used the vehicle; the purpose of the use; the destinations to and from the place of travel (including postcodes); and mileage before the vehicle is used and again the mileage at the point of return. This could then be used as evidence that no private use has been undertaken or, if it has, to ensure it is clearly recorded how that private use was incidental to the business use.
- Annual motor policies: these should be signed by all employees/directors recording that private use of the vehicle is prohibited or ensuring any private use meets the ‘merely incidental’ condition.
- Staff handbook or contractual agreements: stating that the vehicle is available for business use for everyone; prohibiting private use beyond ‘merely incidental to the employee’s business use of it’; and stating where the vehicle should be parked overnight and the rules regarding this, to ensure condition five is met.
- A company vehicle log: to ensure you can accurately log who the car is used by. Employees (including directors) should be required to ‘sign out’ the car and also show when the vehicle was returned, noting date and time.
- Insurance policies: consider the wording in your vehicle’s insurance policies.
How M+A Partners can help
Ensuring you understand the conditions for a vehicle to be a pool car is essential to mitigate the risk of costly tax, interest and penalties in the future.
A company pool car offers a valuable exemption from taxable benefits in kind – if managed correctly.
To find out more about the tax planning and compliance services we provide, get in touch using the details below.
