A ‘company car’ (which broadly means an employer-owned car in this article) is often seen as an expensive ‘perk’ of employment in tax terms. It may therefore appear attractive to argue that a car provided by the employer is a pool car. A ‘pool car’ is broadly one which is generally made available to employees. The business may have only one pool car, or a number of them.
The reason why a pool car is so attractive is that it is treated as not having been made available for the private use of any employees, for the purpose of the car benefit-in-kind charge (in ITEPA 2003, ss 114-148). Furthermore, a pool car is not treated as an ‘employment related benefit’ of the employees (ITEPA 2003, s 167(2)).
When is a car a ‘pool car’?
Not surprisingly, there are a number of conditions to be met before a car can be regarded as being included in a car pool for the use of the employees (ITEPA 2003, s 167(3)). There are five conditions in total, all of which must be satisfied in a particular tax year. These conditions (listed as (a) to (e) in the legislation) are as follows:
(a) The car was made available to, and actually used by, more than one of those employees;
(b) The car was made available, in the case of each of those employees, by reason of the employee’s employment;
(c) The car was not ordinarily used by one of those employees to the exclusion of the others;
(d) In the case of each of those employees, any private use of the car made by the employee was merely incidental to the employee’s other use of the car in that year; and
(e) The car was not normally kept overnight on or in the vicinity of any residential premises where any of the employees was residing, except while being kept overnight on premises occupied by the person making the car available to them.
Note that the above conditions generally relate to the car, rather than any particular employee.
The pool car conditions in practice
On the face of it, the conditions seem clear enough. But in practice, as with most things in tax, there will inevitably be some grey areas. HM Revenue & Customs (HMRC) has provided some guidance in its Employment Income manual.
For example, with regard to the ‘merely incidental private use’ requirement in condition (d) above, HMRC guidance provides an example (at www.hmrc.gov.uk/manuals/eimanual/eim23455.htm) of an employee who is required to make a long business journey, and takes a pool car home overnight so that he or she can make an early start the following morning. Whilst the office to home journey is private use in strictness, HMRC accepts that it is merely incidental to the business use. However, HMRC warns:
“Even so, a reservation is necessary in this type of case. If it happened too often the car would fail condition (e)…because it would be kept fairly often in the vicinity of the employee’s home. In these circumstances the car would not rank as a pooled car.”
In practice, the condition which tends to cause most difficulty is (e) above. With regard to the ‘not normally kept overnight’ test, HMRC states (at www.hmrc.gov.uk/manuals/eimanual/eim23465.htm):
“You can accept that a car is not normally kept overnight at employees’ homes if the total number of nights on which it is taken home by employees, for whatever reason, is less than 60% of the total number of nights in the period under review”. However, HMRC points out that this 60% limit is only a “rule of thumb”. It adds the following caveats:
- If a car or van is taken home often enough to approach the 60% limit, HMRC considers it unlikely that all of the home to work journeys will satisfy the ‘merely incidental’ test (in condition (d)).
- HMRC warns that if it is necessary to consider the interpretation of condition (e) in an appeal before the First-tier Tribunal, it will apply the (stricter) statutory definition, rather than the 60% rule of thumb.
Condition (e) can be particularly problematic in small, family or owner managed businesses, where a business proprietor may be tempted to regularly use a vehicle and yet seek to treat it as a ‘pool car’ to avoid a tax charge as a benefit-in-kind, when in fact it should have been treated as a company car made available for private use.
Conditions not all satisfied
In the recent case Vinyl Design Ltd & Ors v Revenue & Customs  UKFTT 205 (TC), the company had an Audi, which was used by one director, and a Mercedes, which was used by its other director. The company purchased all fuel for the cars. Due to security and vandalism issues, the cars were not left at the company’s premises overnight, but were parked by the directors at their homes. HMRC decided to charge Class 1A National Insurance contributions (NIC) on car and fuel benefits, which was the subject of an appeal. HMRC also considered that the directors were liable to income tax on the car and car fuel benefits.
The First-tier Tribunal (FTT) noted that all five of the above conditions (in ITEPA 2003, s 167) must be satisfied in order for the cars to be considered as pool cars. The onus was on the company and the directors to prove (on a ‘balance of probabilities’) that all five conditions were satisfied.
Unfortunately, the FTT decided in the circumstances that they were not. In particular, the FTT considered it likely on balance that the cars were used by the directors individually. As indicated above, the FTT inferred from the facts that one director used the Audi, and the other director used the Mercedes. The FTT also noted that journeys between a person’s place of home and their place of business is not a business journey (but is ‘ordinary commuting’ and private travel), and considered that the private use of the cars was therefore not incidental to the business use. With regard to the last condition (i.e. that the cars were not normally kept overnight on or in the vicinity of any residential premises where any of the employees were residing), there was no dispute in this case that the cars were taken home every night; that condition was not met.
The FTT concluded that the five conditions in ITEPA 2003, s 167 had not been met, so the vehicles could not be regarded as pool cars. The appeal against HMRC’s Class 1A NIC decision was therefore dismissed, and the car benefit and car fuel benefit charges on the directors were upheld.
An extreme outcome
Incorrectly assuming that a car is a pool car can be an expensive mistake for tax purposes.
In Vinyl Design, the cars in question were brought second hand. The Audi was purchased for £6,000 in 2006 (its list price when new was £21,540), and it was considered to be currently worth £2,000. The Mercedes was purchased for £3,000 in 2004 (its list price was £42,050), and it was said to be currently worth only scrap value.
The cars were apparently first made available to the two directors from 1 August 2007, until they were removed from the business on 1 October 2009. HMRC’s original assessments of Class 1A NICs for the relevant tax years amounted to over £7,500. In addition, the director who used the Audi was assessed to income tax on car and fuel benefit of over £3,800 in total for those tax years, while the director who used the Mercedes was assessed to tax of almost £9,400.
The overall tax and NIC charges in the above case (albeit that the assessments were apparently subject to later adjustment) might seem rather harsh and excessive to many, particularly for second hand cars with such low or nominal values. Unfortunately, the calculation of car and car fuel benefit-in-kind charges do not take current market values into account. Care is therefore needed to avoid expensive and potentially disproportionate tax and NIC liabilities.
If there is a possibility that a company car might not satisfy the conditions to be a pool car, what can be done? It may be advisable to consider withdrawing the cars from the business, or alternatively purchasing ‘greener’ cars (e.g. with low carbon dioxide emissions) to minimise any potential exposure to income tax and NIC charges on car (and car fuel) benefits.
Whether or not all the conditions have been satisfied is essentially a question of fact. Even if all five conditions (in ITEPA 2003, s 167) are satisfied for a car to be treated as pool car, that may not necessarily be enough to prevent tax and NIC charges arising. It is important to be able to demonstrate (to HMRC, and possibly the tribunal) that all the conditions are satisfied.
The FTT in Vinyl Design noted a lack of documentation (e.g. mileage logs showing the amount and use of the vehicles) to support the appellants’ case. The burden of proof at a tribunal hearing will generally be on the taxpayer to demonstrate that the pool car conditions are all satisfied, and there needs to be sufficient documentary evidence to substantiate that each of the five conditions are met. For example, in addition to mileage logs, does the employer expressly prohibit private use of the car by employees in writing? Does the vehicle‘s insurance support its use as a pool car (e.g. does it provide for business use)?
Finally, remember that all the conditions in s 167 must be satisfied – this can be a formidable hurdle to jump. Even if HMRC accepts that the car is a pool car, expect them to check (generally every three or four years) that the conditions are still being satisfied (see www.hmrc.gov.uk/manuals/eimanual/eim23475.htm).
The above article was first published by Tax Insider (www.taxinsider.co.uk).