And as a teaser, would the insurance of a combine harvester allow social and domestic use as well as business use?
The annual P11d season kicks off and chats in the office turn to the taxation of company cars and whether that something that looks like a car, drives like a car can be classified as a pool car. Now, I have seen pickup trucks that don’t pick up but I am sure I have not seen a car with a pool in the back!
Anyway, it turns out I got the wrong end of the stick here (no pun intended) and apparently a pool car is really a car that is not subject to any benefit in kind (“BIK”) charge, so there is lots of incentive for people to claim a car is a pool car when it really isn’t.
The Fagomatic tax case
Back to the chat in the office. Jonathan was reminiscing to the team about pool cars and was recalling there was a famous tax case called Fagomatic which effectively considered “Was the Ferrari a pool car?” - hence the title of this article!
Apparently, the tax case involved the owner of a Ferrari, whose business was restocking cigarette machines in nightclubs. The owner tried to claim that the car was only ever used for business purposes and therefore he was entitled to reclaim £18,000 of VAT he had paid on the car.
Restocking cigarette machines in a supercar!
The business owner maintained that because it was a supercar, bouncers would allow him to park outside their nightclubs and look after it while he was inside restocking cigarette machines.
Well, I know a shaggy dog story when I hear one; and this had all the hallmarks of a wind up. I did some digging and it turns out Jonathan was 101% Dalmatian (i.e. spot on). However, the car involved was a Lamborghini, not a Ferrari.
The taxpayer won the initial argument until HMRC got their big boys involved who appealed the case and won at a higher level.
The view of HMRC regarding pool cars
Now the moral of the story is this: HMRC does not like business people trying to claim that a car is only used for business and therefore qualifies as a pool car, meaning all VAT can be reclaimed. More importantly, that no benefit in kind arises on any employee who uses the car.
Such is HMRC’s dislike of pool cars that there are a number of rules that all have to be met in order for a car to be considered a pool car. In summary these are:
- The car is made available to, and actually used by, more than one employee;
- The car is made available, in the case of each of those employees, by reason of the employee's employment;
- The car is not ordinarily used by one of those employees to the exclusion of the others;
- In the case of each of those employees, any private use of the car made by the employee is merely incidental to the employee's other use of the car in that year; and
- The car is not normally kept overnight on nor in the vicinity of any residential premises where any of the employees reside, except while being kept overnight on premises occupied by the person making the car available to them.
A couple of questions
While that all seems black and white with no wriggle room, tax is full of grey areas.
What happens if an employee takes the car home overnight because they have a long distance journey to make the next day and need an early start?
What about where there is no secure parking at or near the place of work so the car has to be taken home every night by an employee.
HMRC guidance gives a bit of leeway on this as they will accept, as a rule of thumb,
“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.”
Seems clear enough but the guidance also states:
“This 60% test is no more than a rule of thumb that you can apply in order to reach a reasonable settlement in most cases. However, if it should be necessary to consider the interpretation of rules in an appeal before the First-tier Tribunal, rely on the statutory definition rather than this rule of thumb.”
I know I’m a Labrador but the two bits of guidance appear to be contradictory. It seems to me that the guidance is designed to encourage the taxpayer to settle before it gets to any tax hearing.
So how can you prove a pool car is a pool car?
If you are brave (or foolish) enough to want to argue the car is a pool car there are some practical steps you can take that will support your contention if HMRC ever sends in the bloodhounds:
Keep a log of all business trips to prove that there has been no personal use (whatsoever) of the car. If a log is too much trouble, consider fitting a tracker to the pool car or use a smartphone app to record business trips. Please bear in mind that HMRC have access to “Google Maps” and can easily check distances and Outlook diaries and the vehicle’s odometer so no creating fictitious journeys!
I am told by my nice friends at Xero that they will be bringing out a “mileage app” as part of their Expenses App that integrates with its software. This should make life even easier for our Xero clients (see Why your business should be using Xero).
Make personal use of the pool car a disciplinary offence (and ensure that this is included in the employment contract/employment handbook).
If the directors are the only employees, pass a board minute expressly forbidding the private use of the car.
Try to get the insurance policy to exclude personal, social and domestic use. Although apparently this is a favourite pitfall HMRC likes to use in its arguments, this last point is very difficult to achieve and insurance companies may not be willing to do this.
Would the insurance of a combine harvester allow social and domestic use?
Jonathan maintained that one intrepid farmer who was trying to argue his car was a pool car, was faced with HMRC pointing out that the insurance policy for the car allowed social and domestic use. The farmer’s counter argument was that his combine harvester’s insurance policy covered social and domestic use, so this could not be a determining factor in deciding whether the pool car rules were met.
I must admit that on my walks, I haven’t seen a combine harvester parked outside my local, the Black Dog pub. If I did, would that be social and domestic use of a combine harvester?
And the perennial question:
A business is based at the home of the director and the pool car is kept on the drive - can this qualify as a pool car?
There are all sorts of bear traps here so adhere to the following:
- You will need to show that the company employer is a legal occupier of the property. You will also need the car to be parked on the premises (and not, for example, on the road immediately outside the premises).
- Make sure the drive is big enough so that the pool car does not have to be moved to allow the family car to get in or out of the drive - this is personal use after all!
Some scary statistics regarding pool cars
For those that ask:
Does it really matter if we get caught claiming a car is a pool car when it isn’t? Read on, these numbers will frighten you.
The benefit in kind figure is calculated as a % of the list price of the car when new; not as a % of the price you paid for the car. If you incorrectly claim a 10 year old BMW is a pool car, which cost you £6,000 but had a list price of £50,000 when new, the BIK charge is based on the £50,000 figure.
With the BMW being a big old gas guzzler and emitting lots of CO2, the percentage applied to calculate the BIK could be as high as 37%. That means a BIK of £18,500 which equates to £7,400 in extra tax for an employee paying tax at 40%.
You think that’s bad - it gets worse
If the company has paid for all the fuel on the basis that it was a pool car, then the BIK goes up (as private use fuel was provided) to 37% of £74,100. This means a BIK of £27,417 which equates to tax of £10,967 for an employee paying 40% tax.
The company will, of course, have to pay Class 1A National Insurance on the BIK value which at 13.8%, would total £10,226.
Remember, these numbers are for just one tax year; imagine the amount that would be payable if the car had been around for a few years!
Don’t forget the interest and the penalties, which could be substantial (especially if the mileage logs are found to have been a little creative).
Any final tips relating to pool cars?
If you are going to go down the pool car route, a top tip is to get the users of the car to pay for fuel and then claim a fuel only mileage rate on their expenses.
Hopefully, the downsides of incorrectly claiming a car is a pool car will make you think twice about adopting an aggressive tax strategy - especially if the car involved is a Ferrari or a Lamborghini!
Please note that before taking action on any of the views expressed in this article, do contact the helpful team at Rowdens for further advice.