My client has heard that if a car is classified as a “pool car” there will be no benefit in kind arising from its private use and wants to reclassify his company car in this way. Is this possible?

The recent First Tier Tribunal case of D Munden has highlighted the issues of “pooled” cars (or vans) within small owner managed businesses and the need for the company to keep adequate records and proof that the vehicle meet all five of the conditions within section 167 ITEPA2003 (s168 for vans). The case showed that it is not enough for the vehicle to meet some or even most of the conditions it is an “all or nothing” exemption.

The first three conditions within s167– see also EIM23450 – should be straightforward for the company to ensure compliance. The car must be made available and actually used by more than one employee (this also includes Directors); it must be provided to each of them by way of their employment; and the car cannot be ordinarily used by one employee to the exclusion of the others.

In other words, is the car actually used by more than one individual or primarily by one? Where it is used by one individual on a priority basis, the car is unlikely to be classed as a pool car.

The recordkeeping requirements for the final two criteria, however, are often not sufficient enough to satisfy HMRC during an enquiry. The fourth requires proof that the private use of the vehicle – whilst not forbidden– is merely incidental to the business use in the year.

The meaning of ‘merely incidental’ in this context is the area which often carries the most burden of proof. HMRC regard it as implying a qualitative rather than a quantitative test. It does not refer to the extent of private mileage in the year but rather to the private element viewed in relation to each individual journey. HMRCs view is supported by Robson v Dixon where the judge said:

“the words “merely incidental to” are…apt to denote an activity…which does not serve any independent purpose but is carried out in order further some other purpose”.

Thus if the car is used primarily for a business journey, but it includes some limited private use, this would satisfy the condition.

Finally, the vehicle must not to be kept overnight (or in the vicinity of) any residential premises where the employees reside. HMRC use a rule of thumb that this criterion will be satisfied if the car is not taken home by employees, for more than 60% of the total number of nights in the period.

This test is no more than a rule of thumb and whilst it is also mentioned in Booklet 480 (Expenses and Benefits – a tax guide) the legislation at s167(3)(e)ITEPA2003 will always supersede it. However, if the vehicle is taken home often enough to approach the 60% limit, it is unlikely that all the home to work journeys will satisfy the ‘merely incidental’ test.