03/12/2021
The allure of a company car is undeniable, offering convenience and a touch of prestige. However, for businesses, especially smaller ones, the tax implications of providing a company car can be significant. This is where the concept of a 'pool car' becomes particularly attractive. A well-managed pool car scheme can offer substantial tax benefits, essentially allowing employees to use a company vehicle without triggering a personal benefit-in-kind (BIK) charge. But what exactly constitutes a pool car in the eyes of HM Revenue & Customs (HMRC), and how can businesses ensure they are compliant?
What is a Pool Car? The HMRC Definition
At its core, a pool car is a vehicle made available by an employer for the general use of its employees, rather than being allocated to a specific individual. The primary advantage of a car being classified as a pool car is that it is not treated as a taxable benefit for the employee. This means no income tax liability for the driver and no Class 1A National Insurance contributions (NICs) for the employer on the benefit. This exemption is a significant financial incentive, but it comes with a strict set of conditions that must be met.
Key Conditions for Pool Car Status
For a company car to qualify as a pool car, all of the following conditions must be satisfied for the entire tax year in question. These are derived from legislation such as the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003).
| Condition | HMRC Requirement |
|---|---|
| Multiple Users | The car must be made available to, and actually used by, more than one employee. This means it cannot be allocated to a single individual, even if that individual is the sole employee. |
| Reason of Employment | The car must be available to each employee by reason of their employment. This implies that the use of the car is connected to their job role and responsibilities. |
| No Exclusive Use | The car must not be ordinarily used by one employee to the exclusion of others. This is a crucial point; if one person consistently uses the car more than anyone else, it can jeopardise its pool car status. |
| Incidental Private Use | Any private use of the car by an employee must be merely incidental to their business use. This is often the most contentious condition. Examples of incidental use might include taking the car home overnight to start an early business journey the next day. However, using the car for weekend shopping or visiting family would not be considered incidental and would likely disqualify the car as a pool car. |
| Overnight Storage | The car must not normally be kept overnight on, or in the vicinity of, any employee's home. An exception exists if the car is kept overnight on premises owned by the company. HMRC's 'rule of thumb' is that this condition is met if the car is taken home by employees on fewer than 60% of nights. Even this 60% is not a hard and fast rule; if home use becomes too frequent, it can also conflict with the 'incidental private use' condition. |
Applying the Rules to Your Scenario
Let's consider the scenario presented: two directors, who are also the company's only employees, work from home. The company's registered address is also their home address. They intend to use a pool car for business purposes only, with strict mileage records kept.
Based on the HMRC conditions, there are potential challenges:
- Multiple Users: This condition is met as there are two employees who would use the car.
- Reason of Employment: This is likely met if travel is essential for business.
- No Exclusive Use: This will depend on how the car is managed. If both directors use it for similar proportions of business travel, this condition could be met.
- Incidental Private Use: The stated intention is only business use, which would satisfy this. However, any deviation, even a small personal trip, could be problematic.
- Overnight Storage: This is the most significant hurdle. If the car is kept at the directors' home address (which is also the company's registered address), it is being kept overnight at the employees' residential premises. This directly conflicts with the condition that it should not normally be kept overnight at or near an employee's home, unless it's on business premises. Even if the home is also the business address, HMRC's interpretation leans towards the car being stored at a dedicated business location, not an employee's residence.
The case of Vinyl Design Ltd & Ors v Revenue & Customs [2014] highlights the strictness of these rules. In this case, cars were kept at directors' homes due to security concerns. The tribunal found that the condition regarding overnight storage was not met, and therefore, the vehicles could not be considered pool cars, leading to significant tax liabilities.
Therefore, while the intention to use the car solely for business is commendable, the practical issue of where the car is normally kept overnight is likely to prevent it from qualifying as a pool car under current HMRC rules if it's at the directors' home.
What if a Pool Car Isn't Available? Alternatives and Considerations
If a vehicle does not meet the strict criteria for a pool car, it will be treated as a company car made available for private use. This results in:
- Benefit-in-Kind (BIK) Tax: Employees will be liable for income tax on the taxable benefit of using the car. The amount of tax depends on the car's list price, CO2 emissions, and the employee's income tax rate.
- Class 1A NICs: The employer will be liable for Class 1A National Insurance contributions on the value of the benefit.
Alternatives to consider:
- Mileage Allowance: Employees can claim tax relief on mileage when using their own vehicles for business. The current approved mileage rates are 45p per mile for the first 10,000 miles and 25p per mile thereafter. This is a straightforward way to reimburse employees for business travel without incurring BIK tax.
- Rethinking Pool Car Storage: If a true pool car status is desired, the vehicle must be stored at a business premises overnight, not at an employee's home. This might involve renting a small commercial garage or a dedicated parking space at a business park.
- 'Greener' Vehicles: While not directly related to pool car status, choosing vehicles with low CO2 emissions can significantly reduce the BIK tax liability if the car is treated as a company car rather than a pool car.
Practical Management of Pool Cars
For businesses that do successfully operate a pool car scheme, meticulous management is key to maintaining compliance and reaping the tax benefits. Here are some essential practices:
1. Robust Record Keeping (The Pool Car Log)
Accurate and comprehensive records are non-negotiable. A detailed logbook, or increasingly, digital tracking software, should capture:
- Driver's name
- Date and time of journey
- Start and end mileage
- Purpose of the journey (business or private)
- Destination
- Fuel added (if applicable)
This documentation is crucial for demonstrating to HMRC that the car is used appropriately and that private use is indeed incidental.
2. Clear Usage Policies
Establish a clear, written policy for pool car use. This policy should explicitly:
- Define who is permitted to drive the pool car.
- Outline the procedure for booking the car.
- State the rules regarding private use (prohibiting it or defining what constitutes incidental use).
- Detail the process for reporting any damage or maintenance needs.
- Emphasise the importance of accurate logbook completion.
Ensure all employees who might use the pool car are aware of and acknowledge this policy.
3. Insurance and Maintenance
The pool car must be adequately insured for business use, covering all authorised drivers. Regular maintenance is essential to ensure the car's reliability and safety, and to comply with legal requirements. The company is responsible for all aspects of the vehicle's upkeep.
4. Key Management
Implement a secure system for managing vehicle keys, especially if the car is stored at a central business location. This could involve key cabinets or electronic key management systems.
5. Vehicle Scheduling and Availability
For businesses with multiple employees needing access, a booking system (often facilitated by software) is vital to manage availability and prevent conflicts. Consider buffer times between bookings for cleaning or minor checks.
Frequently Asked Questions About Pool Cars
Q1: Can a leased car be used as a pool car?
Yes, a leased car can be used as a pool car, provided the lease agreement permits it and you inform the leasing company. Ensure it has appropriate insurance for pool car usage.
Q2: What happens if a pool car is taken home by an employee overnight?
If an employee takes a pool car home overnight, it must be for a reason that is considered 'merely incidental' to business use, and it must not happen frequently enough to break the 'not normally kept overnight' rule (fewer than 60% of nights). If these conditions aren't met, the car may be treated as a company car with associated tax implications.
Q3: Is there a limit to the number of pool cars a company can have?
No, there is no statutory limit on the number of pool cars a company can operate, provided each vehicle meets the five qualifying conditions.
Q4: Does the company need to own the pool car?
No, the car does not need to be owned by the company. A leased vehicle can also qualify as a pool car if all the conditions are met.
Q5: What if only one employee needs the car at a time?
The car must be genuinely available for use by more than one employee. If in practice, only one employee uses it, or if it's allocated to one employee more than others, it risks losing its pool car status.
Conclusion
Operating a pool car can offer significant tax advantages for businesses. However, the rules are stringent, and meticulous adherence is crucial. The key challenges often lie in demonstrating that private use is genuinely incidental and that the vehicle is not normally kept at employees' homes. For the scenario presented, the most likely obstacle to achieving pool car status will be the storage of the vehicle at the directors' home address. Businesses considering a pool car scheme should carefully review the HMRC conditions and ensure they have robust systems for record-keeping and policy enforcement to avoid costly tax penalties.
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