Understanding the difference between company cars and pool cars for tax purposes

Company cars

When it comes to managing a fleet of vehicles for your business, understanding the distinction between company cars and pool cars is essential for tax purposes. These two types of vehicles come with different tax implications, affecting both the employer and the employee.

In this blog, we'll explore the differences between company cars and pool cars, highlighting their tax treatment and key considerations for businesses.

What is a Company Car?

A company car is a vehicle provided by an employer to an employee for their personal and business use. This type of vehicle is typically allocated to a specific employee and can be used for commuting, business trips, and personal journeys.

Tax Implications of Company Cars:

1. Benefit-in-Kind (BIK) Tax:

   
   

   • Employees who use a company car for personal purposes are subject to BIK tax, which is calculated based on the car's list price and its CO2 emissions.

   • The BIK rate varies depending on the car's environmental impact, with lower rates for electric and hybrid vehicles and higher rates for high-emission cars.

2. Employer’s National Insurance Contributions (NICs):

   
   

   • Employers must pay Class 1A NICs on the value of the car benefit provided to employees.

3. VAT (Value Added Tax):

   
   

   • Employers can reclaim VAT on the purchase of the car if it is used solely for business purposes. If there is personal use, the VAT recovery may be restricted.

4. Fuel Benefit:

   
   

   • If the employer provides fuel for personal use, this also attracts a BIK charge, calculated separately based on a fixed rate.

Pros and Cons of Company Cars:

• Pros:

  • Attractive employee benefit, aiding in recruitment and retention.

  • Simplified expense management for business travel.

• Cons:

  • Higher tax liabilities for employees due to BIK.

  • Additional costs for employers, including NICs and potential VAT restrictions.

What is a Pool Car?

A pool car is a vehicle used by multiple employees for business purposes only. It is not allocated to any individual employee and must meet specific criteria to be classified as a pool car for tax purposes.

Criteria for Pool Cars:

1. Business Use Only:

   
   

   • The car must be used solely for business journeys. Personal use, including commuting, is not permitted.

2. Shared Use:

   
   

   • The car must be available and used by more than one employee.

3. Not Regularly Kept at Employees' Homes:

   
   

   • The vehicle should not be kept overnight at employees' homes except when it is necessary for a business trip.

4. Limited Private Use:

   
   

   • Any private use of the car must be incidental to a business journey, such as stopping for lunch during a business trip.

Tax Implications of Pool Cars:

1. No BIK Tax:

   
   

   • Since pool cars are not used for personal journeys, employees are not subject to BIK tax.

2. No Employer’s NICs:

   
   

   • Employers do not have to pay Class 1A NICs on pool cars.

3. VAT:

   
   

   • Employers can reclaim the full VAT on the purchase and maintenance of pool cars, provided they meet the criteria for business use.

Pros and Cons of Pool Cars:

• Pros:

  • No BIK tax for employees, making it a cost-effective option.

  • Full VAT recovery for employers, reducing costs.

• Cons:

  • Strict criteria must be met to qualify as a pool car.

  • Limited flexibility for employees who may need a vehicle for personal use.

Key Considerations for Businesses

1. Compliance:

   
   

   • Ensure that pool cars meet all criteria to avoid unintended tax liabilities. Keeping detailed records of usage and ensuring the vehicle is not used for personal journeys is crucial.

2. Employee Needs:

   
   

   • Assess whether employees need access to a vehicle for personal use. Company cars can be a valuable perk, but they come with higher tax implications.

3. Cost Management:

   
   

   • Consider the total cost of providing vehicles, including purchase, maintenance, insurance, and tax liabilities. Pool cars can be more cost-effective if personal use is not required.

4. Environmental Impact:

   
   

   • Opting for low-emission vehicles for company cars can reduce BIK rates and align with corporate sustainability goals.

Conclusion

Understanding the difference between company cars and pool cars is essential for managing tax liabilities and providing appropriate vehicle benefits to employees. Company cars offer flexibility and personal use options but come with higher tax implications. In contrast, pool cars provide a tax-efficient solution for business travel with strict usage criteria. By carefully evaluating your business needs and the tax implications, you can make informed decisions that benefit both your employees and your bottom line.