Contents
Understanding pool cars and tax savings
Tax benefits of pool cars for business
With the benefit in kind tax system based on CO2 emissions of a vehicle rather than the value of it, you can have a tax bill for the year that is more than the value of the car. For example a car your company bought for £500 could land you with a £10k tax bill for one year if it wasn’t green.
That’s why having vehicles designated as pool cars can be so attractive to a small business owner because they allow you to eliminate benefit in kind taxes on providing an employee with a company car and they have big VAT savings.
When deciding how to classify a vehicle in your business it’s really important to understand the five rules around pool cars as the UK tax system can trigger penalties, interest and back taxes if HMRC challenge your arrangements.
Key Takeaways
Pool cars can save your business tax by avoiding benefit in kind taxes, VAT and National Insurance contributions if used strictly for business and comply with HMRC rules.
Proper use and documentation including logs of usage and HMRC’s ‘normally kept overnight’ rule are key to preventing pool cars being classified as personal vehicles and incurring fines and penalties.
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Understanding Pool Cars and Tax Savings
Unlike a company car assigned to an employee for work and private use, a pool car is for business use only and minimal personal use, this requires some discipline from a business.
The appeal of pool cars is they can reduce taxes big time. The main advantage is they bypass the regular company car tax rules which can trigger huge tax bills.
It’s not all plain sailing. There are rules you must follow all year. To keep your pool car status and avoid extra taxes you need to follow these rules.
Tax Benefits of Pool Cars for Businesses
The biggest benefit is the exemption from “benefit in kind” taxes. Pool cars are used for business only and not as personal benefits so they bypass this type of taxable benefit.
Businesses can avoid the 13.8% Class 1A National Insurance contributions that apply to company cars.
But it’s more than just tax savings – using pool cars effectively can also make your business run more smoothly. Employees can share vehicles for essential tasks like commuting between the office and client locations or attending offsite events. This means multiple staff members have access to transport when they need it.
The Five Rules
Confusing a pool car with a company car on tax returns is not a minor mistake. It could cost your business up to £3,000 per employee per year. There could be additional fines for late payment of taxes and National Insurance contributions.
To be a pool car a vehicle must meet these conditions:
They must be available for company business if required for an employee’s job.
They must be available for use by multiple employees.
They are kept overnight at least 40% of the time at the trading address of the business and no more than 60% at a residential premises.
Every employee who uses the pool car has access to another vehicle.
Any personal use by one employee is minimal.
HMRC need to be satisfied that pool vehicles are genuinely for business use and not just a way for employees to avoid paying their own travel expenses. To do this they need to know who used the vehicle, where they went and where the vehicle was parked overnight.
HMRC have specific criteria such as the ‘normally kept overnight’ rule to determine whether cars are pool vehicles or not. To comply, any pool vehicle should be parked at an employee’s home overnight no more than 60% of the year. But HMRC will review these practices to ensure they are genuine and not personal use.
HMRC guidance says even if the 60% limit isn’t breached but is approached, the claimant will need to prove that any journeys to work were incidental and not private use. This is likely to be the case where the company vehicle is available to one or two employees and is one of the tax traps to watch out for.
Keeping records of these vehicles has got easier over the years with GPS and software, it’s worth looking into the off the shelf reservation systems available so that any data you store on usage has maximum credibility.
You may also find software can help you use your fleet more efficiently and reduce costs, manage a written policy or identify abuse of the vehicles.
Tribunal Decisions
The case of MWL International Ltd & Anor v The Commissioners for HMRC looks at a misunderstanding around incidental personal use of a pool car and how HMRC challenged the arrangements and applied company car benefit because of misuse.
After a 3 day hearing the tax tribunal judge ruled in favour of HMRC on the basis that the legislation was clear and the claim the taxpayer had been misadvised by them in the past was irrelevant.
Sole Trader Rules
A sole trader or partnership can also employ and while I wouldn’t recommend it because of the risks involved, in certain circumstances the pool car rules can also apply in the same way as for a limited company.
Summary
In this article we’ve covered the basics of using pool cars to save tax, the HMRC rules and pool cars vs company cars. Using pool cars could be a simple way for your business to save and run more efficiently.
Frequently Asked Questions
What exactly qualifies a vehicle as a pool car for tax purposes?
A vehicle is a pool car for tax purposes if it’s available to multiple employees, used only for business travel, not for significant private use. It’s not normally kept overnight at employees’ homes throughout the tax year as per HMRC rules.
How can I prove to HMRC that my vehicle is genuinely a pool car?
To prove to HMRC your vehicle is a pool car you should keep detailed records of business journeys, users, parking locations and nights the vehicle is kept at an employee’s home. Electronic logbooks can also help you record these details automatically.
Can pool cars be used for personal trips at all?
The main use of pool cars should be for business purposes and while they can be used for personal trips occasionally, this should not become their primary use otherwise they will be classed as a company car with the associated tax.
Are there any tax benefits for employees using pool cars?
Yes, employees can benefit from tax savings as they don’t pay ‘benefit in kind’ tax and personal tax. The employer gets a bigger VAT claim and a reduction in their class 1A national insurance bill.
What’s the financial difference between opting for a pool car versus a company car?
Choosing a car from the company pool can save you a lot of tax and running costs as it’s not subject to company car tax and there’s less fuel and maintenance costs.
