Category: Finance & Accounting

Failing to take your record keeping obligations seriously as a landlord could mean that you pay more tax than necessary, or worse that you could be on the receiving end of a penalty from HMRC.

Buying a property to let – the importance of keeping records from day one

For tax purposes, good record keeping is essential. Without complete and accurate records, it will not be possible to provide correct details of taxable income or to benefit from allowable deductions. Aside from the risk of paying more tax than is necessary, landlords who fail to take their record keeping obligations seriously may also find that they are on the receiving end of a penalty from HMRC.

Recording expenses

A deduction is available for expenses that are incurred wholly and exclusively for the purposes of the rental business. A deduction is available for qualifying revenue expenses regardless of whether the accounts are prepared on the cash basis or under the traditional accruals basis.

Revenue expenses are varied and are those expenses incurred in the day to day running of the property rental business. They include:

  • office expenses
  • phone calls
  • cost of advertising for tenants
  • fees paid to a managing agent
  • cleaning costs
  • insurance
  • general maintenance and repairs

A record should be kept of all revenue expenses, supported by invoices, receipts and suchlike.

The treatment of capital expenditure depends on whether the cash or the accruals basis is used. For most smaller landlords, the cash basis is now the default basis.

Under the cash basis, capital expenditure can be deducted unless the disallowance is specifically prohibited (as in the case in relation to cars and land and property). Under the accruals basis, a deduction is not given for capital expenditure, although in limited cases capital allowances may be available. Capital expenditure would include improvements to the property and new furniture or equipment which does not replace old items.

Records should identify whether expenditure is capital or revenue and also whether it relates to private expenditure so that it can be excluded.

Records should also be kept of replacement domestic items and the nature of those items. A deduction is available on a like-for-like basis.

Start date

Although the property rental business does not start until the property is first let, records should start as soon as expenditure is incurred in preparation for the letting.

As well as allowing relief for expenses incurred while the property is let, relief is also available for expenses which are related to the property rental business and which are incurred in the seven years prior to the start of the business. Relief is given on the same basis as for expenses incurred after the start of the property rental business; expenses can be deducted as long as they are incurred wholly and exclusively for the purposes of the property rental business. Capital expenditure is treated in accordance with rules applying to the chosen basis of accounts preparation.

Relief is available under the pre-trading rules, as long as:

  • the expenditure is incurred within a period of seven years before the date on which the rental business started
  • the expenditure is not otherwise allowable as a deduction for tax purposes
  • the expenditure would have been allowed as a deduction has it been incurred after the rental business had started

Relief is given by treating the expenses as if they were incurred on the first day of the property rental business.

Expenses incurred in getting a property ready to let can be significant. It is important that accurate records are kept of all expenditure incurred wholly and exclusively for the purposes of the let from the outset so that valuable deductions are not overlooked.

Partner note: ITTOIA 2005, s. 57; CTA 2009, s. 61.

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The delayed start date for the domestic reverse VAT charge has given businesses an extra year to prepare for the charge. We explain what you can do to prepare.

Domestic reverse VAT charge for building and construction services

The domestic reverse VAT charge for building and construction services was due to come into effect from 1 October 2019. However, in early September it was announced that the start date had been put back one year. As a result, the charge will now apply from 1 October 2020.

Who is affected?

The charge will affect individuals and businesses who are registered for VAT in the UK and who supply or receive specified services that are reported under the Construction Industry Scheme (CIS).

Nature of a reverse charge

The reverse charge means that the customer receiving the specified supply has to pay the VAT rather than the supplier. In turn, the customer can recover the VAT under the normal VAT recovery rules.

Supplies within the scope of the charge

The reverse charge will apply to supplies of building and construction services which are supplied at the standard or reduced rates that also need to be reported under the CIS. These are called specified supplies.

However, where materials are included within a service, the reverse charge applies to the whole amount. By contrast, where deductions are made from payments to subcontractors under the CIS, no deductions are made from any part of the payment that relates to material.

Move to monthly returns

The introduction of the reverse charge will mean that some businesses may become repayment traders claiming VAT back from HMRC rather than paying it over to HMRC. To aid cashflow and reduce the delay in claiming the VAT back, repayment traders can move to monthly returns.

Planning ahead

The delayed start date has given businesses an extra year to prepare for the charge. In order to be ready for its introduction, businesses within the CIS should:

  • check whether the reverse charge will affect their sales, their purchases or both
  • update their accounting systems and software to deal with the reverse charge from 1 October 2020
  • consider whether the change will impact on cashflow
  • ensure that staff who are responsible for VAT accounting are familiar with the reverse charge and how it will operate

Contractors should review their contracts with subcontractors to determine whether the reverse charge will apply to services received under the contract. Where it does, they will need to notify their suppliers.

Subcontractors will need to contact their customers to obtain confirmation from them as to whether the reverse charge will apply, and also whether the customer is an end user or intermediary supplier.

Impact of change of start date

HMRC recognise that the start date was changed at short notice and that businesses may have changed their invoices to meet the needs of the reverse charge and cannot easily change them back. Where errors arise as a result, HMRC will take the change of date into account.

Partner Note: The Value Added Tax (Section 55A) (Specified Services and Excepted Supplies) Order 2019 (SI 2019/892); The Value Added Tax (Section 55A) (Specified Services and Excepted Supplies) (Change of Commencement Day) Order 2019 (Si 2019/1240).

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Property Business – What SIC code should I use for my property Company ?

A SIC code stands for Standard Industrial Classification code, and classifies your business activity at Companies House. SIC code for a company can be changed at any time and be amended when you file your next  Confirmation Statement. While forming a company to run your property business, you will be asked to provide SIC code which closely describes your business activities. There are various reasons to choose an appropriate SIC code so as to avoid any complexities later on with tax authorities and Lenders.

Practically, there are only four: 68100, 68209, 68320 and 68310, and here’s a brief explanation of their classification.

  1. SIC code 68100 is for the buying and selling of own real estate; so, if you’re going to be flipping and trading, this would be the code for you. So if you intend to buy properties to resell, then this is the appropriate SIC code.

2.    SIC code 68209 is for the letting and operating of own or leased real estate. In other words, for buying and holding property and renting it out.      So if you are buying a property to hold as an investment (single BTLs or HMOs) or if you are using Rent to Rent strategy this will be the SIC code for  your company.

 

  1. SIC code 68320 is for the management of real estate on a fee or contract basis. So, for example if you’re going to set up your own management company, then this would be the right classification for you.

 

  1. SIC code 68310 is for real estate agencies. So, for all the deal sourcers/packagers who act as an agent for investors.

As you can see, these codes effectively tell Companies House what a business is going to be doing from a tax point of view. You can choose up to a maximum of four SIC codes for one company. SIC codes also play a crucial role with lenders/Finance providers – again, these codes let lenders know what activity a property company is going to undertake, and will help lenders assess whether they want to lend to you or not.There are issues however with having multiple property activities running through the same company, and it would be wise to seek professional advice to ensure your company structure is correct and efficient from the outset, with particular consideration to Capital Gain Tax and business property relief.

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If you’ve read anything about property and tax, you’ll probably have heard the terms ‘nominating your main residence’ and ‘flipping’. This blog takes you exactly what these terms mean and how and when they apply.

Private residence relief shelters a gain on the sale of a residence from capital gains tax while the property has been the owner’s only or main residence. Where a property has been an only or main residence at some point, the final period of ownership (currently 18 months but reducing to nine months from 6 April 2020) is also exempt from capital gains tax.

Only one main residence at a time

As the name suggests, the relief is only available in respect of the only or main residence. Thus, where a person has more than one home, only one of those homes can be the ‘main residence’ at any given time.

However, as long as certain conditions are met, the taxpayer is free to choose which property is classed as the ‘main’ residence for capital gains tax purposes – it does not have to be the one in which the owner spends the majority of his or her time.

Only one main residence per couple

A couple who are married or in a civil partnership and who are not separated can only have one main residence between them.

Property must be a residence

Only properties that are lived in as a home can be a ‘main residence’ – a property which is let out can’t be a main residence while it is let.

Making an election

Where a person has only one residence, that residence is their only or main residence. Where they acquire a second residence, they have a period of two years to nominate which residence is the main residence for capital gains tax purposes. Where residences are acquired or sold, the clock starts again from the date on which the particular combination of residences changes, and the taxpayer then has another two years in which to elect which residence is the main residence.

The election should be made in writing to HMRC. The letter should include the full address of the property being nominated as the main residence and should be signed by all owners of the property.

No election made

In the absence of an election, the property which is the main residence will be determined as a question of fact and will be the property in which the person lives in as their main home. For example, if a couple has a family home and a holiday home, in the absence of an election, the family home will be treated as the main residence.

Advantages of flipping

There are a number of advantages to a property being the main residence at some point in the period of ownership as not only is any gain while the property is the only or main residence exempt from capital gains tax; the final period of ownership is also exempt. Where the property is let, occupying the property as a main residence at some point may open up the option of lettings relief (although it should be noted that the availability of lettings relief is to be seriously curtailed from April 2020).

Once an election has been made to nominate a property as a main residence, this can be varied any number of times (‘flipping’). This can be very useful from a tax planning perspective, for example, occupying a property as a main residence after it has been let but before it is sold can shelter some of the gain. Flipping properties and making use of the capital gains tax annual exempt amount to shelter any gain that falls into charge when the property is not the main residence can be beneficial in reducing the tax bill.

Partner note: TCGA 1992, s. 222

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Wondering whether to use dividends or a salary? Read this blog to find out why dividends are more cost-effective.

Director’s salary or bonus?

Given current tax rates, paying a dividend rather than a salary will often be a more cost-effective way of withdrawing profits from a company.

Tax is currently payable on any dividend income received over the £2,000 annual dividend allowance at the following rates:

  • 7.5% on dividend income within the basic rate band (up to £37,500 in 2019-20)
  • 32.5% on dividend income within the higher rate band (£37,501 to £150,000 in 2019-20)
  • 38.1% on dividend income within the additional rate band (over £150,000 in 2019-20)

However, if the company is loss-making and has no retained profits, it will not be possible to declare a dividend, and an alternative will need to be considered. This often involves an increased salary or a one-off bonus payment.  

From a tax perspective, the position will be the same whether a salary or bonus is paid. Both types of payment attract income tax at the recipient’s relevant rate of tax (20%, 40% or 45% as appropriate).

However, from a National Insurance Contributions (NICs) perspective, the position, and any potential cost savings, will depend on whether or not the payment is made to a director.

Directors have an annual earnings period for NIC purposes. Broadly, this means that NICs payable will be the same regardless of whether the payment is made in regular instalments or as a single lump sum bonus.  In addition, since there is no upper limit of employer (secondary) NICs, the company’s position will be the same regardless of whether the payment is made by way of a salary or a bonus.

Where a bonus or salary payment is to be made to another family member who is not a director, the earnings period rules mean that it may be possible to save employees’ NICs by paying a one-off bonus rather than a regular salary.

Example

Henry is the sole director of a company and an equal 50% shareholder with his wife Susan. In 2019/20 they each receive a salary of £720 per month.

In the year ended 31 March 2020, the company makes profits of £24,000 (after paying the salaries). The profits are to be shared equally between Henry and Susan. They want to know whether it will be more cost effective to extract the profits as an additional salary – each receiving an additional £1,000 per month for the next twelve months – or as a one-off bonus payment with each receiving £12,000.

The income tax position will be the same regardless of which method is used.

As Henry is a director, his NIC position will be the same regardless of which route is taken as he has an annual earnings period for NIC purposes.

Susan is not a director, so the normal earnings period for NIC in a month will be the interval in which her existing salary is paid.

Assuming NIC rates and thresholds remain the same in 2020/21, if Susan receives an additional salary of £1,000 a month, she will pay Class 1 NIC of £120 (£1,000 x 12%) a month on that additional salary. Her annual NIC bill on the additional salary of £12,000 will be £1,440.

However, if she receives a lump sum bonus of £12,000 in one month (in addition to her normal monthly salary of £720), she will pay NIC on the bonus of £585 ((£3,450 x 12%) + (£8,550 x 2%)).

Paying a bonus instead of a salary reduces Susan’s NIC bill by £855.

Finally, it is important to note that in determining an effective company profit extraction strategy, tax should never be the only consideration. Any profit extraction strategy should be consistent with the wider goals and aims of the company.

Partner note: SI 2001/1004, Reg 11

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Are you a working parent? You might be missing out on £2,000 per child per year towards the cost of childcare.

Tax-free childcare update

HMRC have recently run a campaign to remind people that they could be missing out on up to £2,000 per child, per year, towards the cost of childcare.

Working parents and guardians may be eligible to receive government top-ups of £2 for every £8 that they pay into a tax-free childcare account, up to a maximum of £2,000 per child (or £4,000 for disabled children), although there is an overall maximum limit of £10,000.

The scheme is open to all working parents across the UK with children under 12, or under 17 if disabled.

Under the scheme, the parent/guardian opens an online account via the government’s Childcare Choices website and decides how much to pay in and how often. The flexible nature of the accounts mean that account holders can pay in more in some months, and less at other times, depending on how much they have spare to invest. The account holder’s circumstances are re-confirmed online every three months. Money can be withdrawn at any time but the government contribution will be lost.

Again, the flexible nature of tax-free childcare allows anyone to pay into the account, including grandparents, other family members or employers.

To qualify for the government contribution, account holders will usually have to be in work, expecting to earn at least the National Minimum Wage (NMW) or National Living Wage (NLW) for 16 hours a week on average, over the next 3 months. This currently equates to at least £1,707.68, which is equivalent to the NLW for people over 25.

Where an individual is not working, they may still be eligible for tax-free childcare if their partner is working, and they receive Incapacity Benefit, Severe Disablement Allowance, Carer’s Allowance or Employment and Support Allowance. It is also possible to apply where the claimant is starting or re-starting work within the next 31 days.

Self-employed people who do not expect to make enough profit in the next three months can use an average of how much they expect to make over the current tax year. Additionally, the earnings limit does not apply to self-employed individuals who started their business less than twelve months ago.

Where the individual, or their partner, has an ‘adjusted net income’ over £100,000 in the current tax year they will not be eligible for tax-free childcare.

Broadly, ‘adjusted net income’ is total taxable income before any personal allowances and minus certain payments, such as those made under Gift Aid. It is also worth noting that the £100,000 limit includes any expected bonuses.

It is not possible to receive tax-free childcare at the same time as claiming Working Tax Credit , Child Tax Credit , Universal Credit (UC) or childcare vouchers. Which scheme the individual is better off with depends on their situation. The Childcare Choices website includes a childcare calculator for parents to compare all the government’s childcare schemes on offer and check which works best for their families, including the 30-hour free childcare offer, tax-free childcare or universal credit.

Employer-provided childcare

Tax-free childcare effectively replaces HMRC’s employer-supported childcare scheme. However, parents who joined an employer-childcare voucher scheme before 4 October 2018 have the option of remaining in that scheme for as long as the employer offers it, or for as long as they stay with the employer. The employer-provided voucher scheme closed to new entrants from 4 October 2018.

Where an individual decides to switch from childcare vouchers or directly contracted childcare, they must tell their employer within 90 days of applying for tax-free childcare.

Finally, with regards to UC, HMRC recommend that the claimant waits until a decision on a tax-free childcare application is received before cancelling a UC claim.

Anyone who pays for childcare would be wise to check their eligibility for tax-free childcare as they could be missing out on considerable financial support.

Partner note: HMRC guidance https://www.gov.uk/tax-free-childcare; Childcare Choices website https://www.childcarechoices.gov.uk/

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Even if your business hasn’t reached the £85,000 turnover threshold, there are some benefits to registering for VAT early.

VAT registration – sooner or later?

Once a business is up and running, the next major administrative area to be faced often concerns the subject of VAT. At first glance, it looks complicated – not to mention time-consuming – particularly for small businesses. However, taken one step at a time, the rules governing VAT registration and invoicing are generally quite straight-forward and relatively easy to navigate.

The law states that all traders – whether sole traders, partnerships, or limited companies – are obliged to register to charge and pay VAT once their taxable turnover reaches a pre-set annual threshold, which is currently £85,000. Broadly, a business must register for VAT if:

  • its taxable outputs, including zero-rates sales (but not exempt, non-business, or ‘outside the scope’ supplies), have exceeded the registration threshold in the previous 12 calendar months – unless the business can satisfy HMRC that its taxable supplies in the next 12 months will not exceed a figure £2,000 below the registration threshold (so currently £83,000); or
  • there are reasonable grounds for believing that the business’s taxable outputs in the next 30 days will exceed the registration threshold; or
  • the business takes over another business as a going concern, to which the two bullet points above apply.

A business can register for VAT voluntarily if its turnover is below the threshold and it may actually save tax by doing so, particularly if its main clients or customers are organisations that can reclaim VAT themselves.

Example

Sandra is a non-VAT registered carpenter and a basic rate taxpayer. She buys a new saw to use in her business, which cost £100 plus VAT, so she pays a total of £120 (£100 plus VAT at 20%), which can be set against her business profits for income tax purposes. As Sandra is a basic rate (20%) taxpayer, she will save tax of £24 (20% of £120), so the saw actually costs her £96. However, if the business is VAT-registered, the £20 VAT paid on the item (the input tax) can be reclaimed and £100 is set against business profits for income tax. The tax reduction is therefore £20 (20% of £100) and the saw actually costs him £80 – saving £16 by being registered for VAT.

Is non-registration preferable?

VAT-registered businesses supplying goods and services to private individuals often feel dis-advantaged compared with their non-registered counterparts because they have to charge an additional 20% on every bill issued.

A trader who does not want to have to register for VAT, may be able to stay below the annual VAT registration threshold by supplying labour-only services and getting customers to buy any goods needed themselves.

Example

Bob is a non-VAT registered plumber, but his turnover is creeping up towards the VAT registration threshold. He could ask his customers to buy materials for a job directly from a DIY shop. Although the customers will have to pay the VAT on these items, they won’t have to pay VAT on Bob’s invoice for labour services. This will also have the additional advantage of reducing Bob’s annual turnover for VAT registration purposes.

Registration benefits

Deciding whether to register for VAT voluntarily before the registration threshold is reached is a big decision that can have lasting implications for the financial health of the business. It is vital therefore, that the matter is given careful consideration. There are several positive reasons supporting voluntary registration, including:

  • Reclaiming VAT – although a registered business will have to charge VAT on goods and services (known as charging ‘output tax’), it will also be able to reclaim VAT that it is charged by other businesses (known as ‘input tax’). Where input tax exceeds output tax in a given period, the business will generally be able to reclaim the difference from HMRC.
  • Marketplace perceptions – some businesses choose to register for VAT in order to appear larger than they are. Customers are likely to be aware of the £85,000 registration threshold and where a business is not registered, its customers will know that the business turnover is lower than this. A business may therefore consider registration as a way of increasing its standing amongst competitors, and in the eyes of clients.

Partner note: VATA 1994, Sch 1; HMRC VAT Notice 700/1

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If you receive Universal Credit or any other forms of tax credit, read our blog to check if you need to update HMRC on any circumstance change.

Tax credits – do I have to tell HMRC if my circumstances change?

Tax credits are benefit payments that are paid to people in work who are on a low income or have children. There are two tax credits – working tax credit (for those working but on a low income) and child tax credit (for those on low income, regardless of whether they are working or not, with children). Existing tax credit claimants need to renew them each year.

New claimants must claim Universal Credit rather than Working or Child Tax Credits; eventually, existing tax credit claimants will be moved over to Universal Credit. This is due to happen between November 2020 and December 2023.

Tax credits can go up or down as a result of changes in family or work circumstances.

Changes in that must be reported to HMRC

A tax credit claimant must report any of the following changes in circumstance to HMRC.

  1. Living circumstances change, for example if a partner moves out, or you start to live with a new partner, you get married or form a civil partnership, or you separate permanently, or you divorce.
  2. Your partner or child dies.
  3. A child leaves home or is taken into care.
  4. A child is taken into custody.
  5. A child over the age of 16 leaves approved education or training or a careers service.
  6. Childcare costs go down by more than £10 per week, or you start receiving help with childcare costs.
  7. If you are in a couple, your combined working hours fall to below 30 hours per week.
  8. Working hours fall below the minimum needed for working tax credit, which depend on circumstances.

It is necessary to make a new claim if a relationship ends or you start a new relationship, or if your partner dies.

You must also tell HMRC if any of the following occur.

  1. You go abroad for eight weeks or more.
  2. You leave the UK permanently or lose your right to reside in the UK.
  3. You reduce your working hours to less than 16 hours per week while claiming childcare costs.
  4. You have been on strike for more than 10 consecutive days.

Changes in income, benefits and working hours

If tax credits are overpaid, the overpayment will need to be returned to HMRC. To avoid building up an overpayment which will have to be paid back, HMRC should be notified if any of the following occur.

  1. A change in income (if increases or decreases by £2,500 HMRC should be notified immediately so that tax credit payments can be adjusted)
  2. Combined working hours for a couple who have children are increased to 30 hours a week or more.
  3. You have a baby or take on responsibility for another child.
  4. You start or stop claiming benefits or your benefits change.
  5. You start or stop getting a disability payment.
  6. Your child is certified blind (or is no longer blind).
  7. You start paying for registered or approved childcare.
  8. You stop getting help with childcare.

Time limit for reporting changes

The above changes must be reported to HMRC within one month of the date on which they occur.

Report changes online

Changes can be notified online at www.gov.uk/changes-affect-tax-credits.

Partner note: www.gov.uk/changes-affect-tax-credits

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This blog explains the most common mistakes that are made in directors’ loan account tax returns.

Directors’ loan accounts – avoiding the risks

HMRC produce a series of toolkits which set out common errors that they find in returns. The hope is that by being familiar with the mistakes that are routinely made, steps can be taken to avoid them. Although the toolkits are aimed primarily at agents, they are useful for anyone who has to complete a tax return. The directors’ loan accounts toolkit highlights the key areas of risk in relation to directors’ loan accounts. The latest version of the toolkit was published in May 2019 and should be used for personal tax returns for 2018/19 and for company returns, for the financial year 2018.

Personal expenses

Expenses are only deductible in computing taxable profits to the extent that they are incurred wholly and exclusively for the purposes of the trade. A company is a separate legal entity to the directors and shareholders. However, many close companies meet directors’ personal expenses. Where these are not part of the director’s remuneration package, the company cannot deduct the cost when computing its taxable profits. Instead, they should be charged to the director’s loan account. The director’s loan account toolkit focuses on expenses that do not form part of the director’s remuneration package.

Risk areas

  1. Review of the accounts – any personal expenditure incurred by the director and paid for by the company must be allocated correctly, i.e. an allowable expense where it forms part of the director’s remuneration package and charged to the director’s loan account. Account headings should be reviewed to identify director’s personal expenditure which has not been treated correctly.
  2. Loans to participators – under the close company rules, tax (section 455 tax) is charged at 32.5% on loans to directors who are also shareholders where the loan remains outstanding nine months and one day after the end of the accounting period. Review overdrawn loan accounts to check whether the company is liable to pay section 455 tax.
  3. Review of expenses and benefits – where a director is provided with anything other than pay, it may need to be reported to HMRC as a benefit in kind on form P11D. Review expenses and benefits for taxable items that may have been missed. It should be noted that if the director’s loan account balance exceeds £10,000 at any point in the tax year, a benefit in kind charge will arise on the loan unless the director pays interest at a rate that is at least equal to the official rate (2.5% since 6 April 2017).
  4. Self-assessment – check whether the director needs to send a self-assessment return. The directors’ loan accounts toolkit states that “Company directors do not need to send a tax return unless that have other taxable income that needs to be reported, or if HMRC has sent a notice to file a return”.
  5. Record keeping – good keeping is essential. Poor records may mean expenditure is missed or allocated incorrectly.

Checklist

The toolkit features as useful checklist which can be completed to make sure that nothing is overlooked. The checklist contains a helpful link to HMRC guidance.

Partner note: Directors’ loan account toolkit, see www.gov.uk/government/publications/hmrc-directors-loan-accounts-toolkit-2013-to-2014.

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There are five conditions that need to be met to get the tax benefits of a pool car.

When is a car a pool car?

Rather than allocating specific cars to particular employees, some employers find it preferable to operate a carpool and have a number of cars available for use by employees when they need to undertake a business journey. From a tax perspective, provided that certain conditions are met, no benefit in kind tax charge will arise where an employee makes use of a pool car.

The conditions

There are five conditions that must be met for a car to be treated as a pool car for tax purposes.

  1. The car is made available to, and actually is used by, more than one employee.
  2. In each case, it is made available by reason of the employee’s employment.
  3. The car is not ordinarily used by one employee to the exclusion of the others.
  4. In each case, any private use by the employee is merely incidental to the employee’s business use of the car.
  5. The car is not normally kept overnight on or in the vicinity of any of the residential premises where any of the employees was residing (subject to an exception if kept overnight on premises occupied by the person making the cars available).

The tax exemption only applies if all five conditions are met.

When private use is ‘merely incidental’

To meet the definition of a pool car, the car should only be available for genuine business use. However, in deciding whether this test is met, private use is disregarded as long as that private use is ‘merely incidental’ to the employee’s business use of the car.

HMRC regard the test as being a qualitative rather than a quantitative test. It does not refer to the actual private mileage, rather the private element in the context of the journey as a whole. For example, if an employee is required to make a long business journey and takes the car home the previous evening in order to get an early start, the private use comprising the journey from work to home the previous evening would be regarded as ‘merely incidental’. The car is taken home to facilitate the business journey the following day.

Kept overnight at employee’s homes – the 60% test

For a car to meet the definition of a pool car, it must not normally be kept overnight at employees’ homes. In deciding whether this test is met, HMRC apply a rule of thumb – as long as the total number of nights on which a car is taken home by employees, for whatever reason, is less than 60% of the total number of nights in the period, HMRC accept that the condition is met.

When a benefit in kind tax charge arises

If the car does not meet the definition of a pool car and is made available for the employee’s private use, a tax charge will arise under the company car tax rules.

Partner note: ITEPA 2003, s. 167.

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