How to Use Pool Cars to Save Tax

Contents

Key takeaways

Understanding pool cars and tax savings

Tax benefits of pool cars for business

The five rules

Tribunal decisions

Sole trader rules

Summary

Frequently asked questions

With the benefit in kind tax system been driven by the CO2 emissions of a vehicle rather than the value of it, it is possible to have a tax bill in a year that is even greater than the value of the car. For example a vehicle your company bought for £500, could well land you with over a £10k tax bill just for one year if it wasn’t environmentally friendly.

This is why having vehicles designated as pool cars can be very appealing to a small business owner because they create an opportunity to eliminate benefit in kind taxes on providing an employee with a company car and they also have significant VAT savings.

When deciding how to designate a vehicle in your business, it’s really important to understand the specific rules around pool cars as the UK tax system can trigger penalties, interest charges and back taxes if a subsequent investigation by HMRC decides to challenge arrangements.

Key Takeaways

  • Pool cars offer significant tax savings for businesses by avoiding ‘benefit in kind’ taxes, VAT and National Insurance contributions, provided they are used strictly for business purposes and comply with HMRC regulations.

  • Proper use and documentation, including maintaining logs of usage and adhering to HMRC’s ‘normally kept overnight’ rule, are essential to prevent pool cars from being classified as personal vehicles and incurring fines and penalties.

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Understanding Pool Cars and Tax Savings

Illustration of a group of diverse employees using a pool car for business purposes

In contrast to a company car typically assigned to an employee for both work and private trips, a pool car is intended solely for professional tasks and minimised personal use, this often requires a certain degree of discipline for a business.

The attractiveness of having pool cars comes from their ability to drive down taxes significantly. The key advantage is that they bypass regular company car tax rules, which can cause extortionate tax bills.

It’s not all smooth driving. There are strict rules you must follow all year. To keep your pool car status and avoid extra taxes, you need to follow these rules carefully.

Tax Benefits of Pool Cars for Businesses

Illustration of a tax savings calculator with the text 'Tax Benefits' highlighted

The most immediate benefit is the exemption from “benefit in kind” taxes. Pool cars are used solely for business purposes and not as personal benefits, allowing them to bypass this specific type of taxable benefit.

Businesses can avoid the hefty 13,8% Class 1A National Insurance contributions that are usually linked to company cars.

But it’s more than just avoiding taxes – using pool cars effectively can also help your business run smoother. Employees can share vehicles for essential tasks like commuting between the office and client locations or attending offsite events. This ensures that multiple staff members have access to transportation when they need it.

The Five Rules

Confusing a pool car with a company car on tax documents is not a trivial error. It could lead to financial penalties of up to £3,000 annually for each employee involved. There might be extra fines related to delayed payments for both taxes and National Insurance contributions.

For a car to be successfully classified as a pool vehicle it must meet these following conditions:

  1. They must be available for company business if required for an employee’s duties.

  2. They must be available for use by multiple employees.

  3. 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.

  4. Every employee who uses the pool car has access to another vehicle.

  5. Any personal use by one employee is merely incidental to business use.

It’s crucial for HMRC to verify that pool vehicles are genuinely allocated for professional use rather than being an avenue through which employees avoid paying their own travel expenses. To do this effectively, companies must document who used the vehicle, their destination, and where the vehicle was parked overnight.

HMRC employs specific criteria such as the ‘normally kept overnight’ standard when evaluating whether cars qualify as pool vehicles or not. To ensure compliance, any qualifying pool vehicle should be parked at an employee’s home overnight no more than 60% of the year. Even so, HMRC will review these practices to ensure they are genuine and not for personal use.

Guidance from HMRC states that even in instances where the 60% limit isn’t breached but approached, there will be a significant requirement for a claimant to prove that any journeys to work were incidental and not private use. This is likely in the event that the company vehicle was made available to one or two employees and is one of the tax traps to watch out for.

Keeping accurate records of these vehicles has become easier as GPS technology and software has advanced over the years, it’s worth looking into the off the shelf reservation systems available so that any data you store regarding usage has the maximum amount of credibility.

You may also find that software can help you use your fleet more efficiently and lower 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 considers a misunderstanding around having incidental personal use associated with a pool car and how HMRC challenged arrangements and applied company car benefit due to it’s misuse.

Eventually after a 3 day hearing the tax tribunal judge ruled in favour of HMRC on the basis that the legislation was perfectly clear and the claim the the taxpayer had been misadvised historically by them was irrelevant.

Sole Trader Rules

A self employed person or a partnership can also provide employment and while I really wouldn’t recommend it due to the risks involved, in specific circumstances the pool car rules may also apply in the same way they would for a limited company.

Summary

In this guide, we’ve covered the basics of using pool cars to save on taxes, explained the key HMRC rules, and compared pool cars to company cars. Using pool cars could be a simple way for your business to save money and run more smoothly.

Frequently Asked Questions

What exactly qualifies a vehicle as a pool car for tax purposes?

A vehicle qualifies as a pool car for tax purposes if it is available for work purposes to multiple employees, used strictly for business travel, and not for significant private use. It must also not be normally kept overnight at employees’ homes, meeting the conditions set by HMRC throughout the tax year.

How can I prove to HMRC that my vehicle is genuinely a pool car?

To prove to HMRC that your vehicle is genuinely 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. Using electronic logbooks can also help automatically record these details.

Can pool cars be used for personal trips at all?

The main use of pool cars should be for business purposes, and while they may occasionally be used for personal trips, this must not become their primary function to prevent them from being deemed a company car with the consequential taxes.

Are there any tax benefits for employees using pool cars?

Indeed, employees may gain tax advantages by utilising pool cars since they are not subjected to ‘benefit in kind’ taxes, resulting in personal tax savings. The employer also benefits from an enhanced 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’s pool can lead to substantial savings on tax and operating costs because it is not subject to company car tax, and there are lower fuel and maintenance expenses involved.

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