A: 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 meets all five of the conditions within section 167 of the Income Tax (Earnings and Pensions) Act 2003 (section 168 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 of section 167 – 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 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? Where it is used by one individual on a priority basis, the car is unlikely to be classed as a pool car.
The record-keeping requirements for the final two criteria, however, are often not sufficient to satisfy HMRC during an enquiry. The fourth requires proof that the private use of the vehicle – while not forbidden – is merely incidental to the business use in the year.
The meaning of “merely incidental” in this context often carries the most burden of proof. HMRC regards 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.
HMRC’s 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 to further some other purpose.”
Thus if the car is used primarily for a business journey, but 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 uses a rule of thumb that this criterion will be satisfied if the car is not taken home by employees, for more than 60 per cent of the total number of nights in the period.
This test is no more than a rule of thumb and, while it is also mentioned in Booklet 480: Expenses and Benefits – A Tax Guide, the legislation at section 167(3)(e) of ITEPA2003 will always supersede it. However, if the vehicle is taken home often enough to approach the 60 per cent limit, it is unlikely all the home-to-work journeys will satisfy the ‘merely incidental’ test.
Ben Chaplin is managing director of Taxwise
