The Highway Code of company cars

Many businesses offer a company car as an employee benefit in kind. This is a great incentive for staff, but employers could face a HMRC challenge if they do not first review their procedures and employment terms and conditions, writes Andrew Stephenson from Pierce Chartered Accountants.

There are over 940,000 company cars in use on UK roads. Many businesses use them to entice new employees or retain existing staff. They can be an attractive perk of the job. However, businesses need to be aware of HMRC regulations of both company car and pool car schemes.

Employers need to be clear with their staff what the purpose of the car is as this has an impact on VAT recovery. Is it strictly just for business use in the form of a pool car, or is it a company car which can be used for work and personal travel? This detail should be clearly stated in the employee’s contract.

If the car is not intended for personal use, then the company needs to enforce measures to prevent this from happening. This must be done using either a physical or contractual restraint. Companies and employees also need to be aware that private use of a car includes travelling between home and work, unless it is a temporary place of work.

Physical constraints can include ensuring that keys are locked away and a log book or diary is maintained showing who booked the car out and when, as well as details of the journey and mileage. Best practice would also include having clear rules in place stating the circumstances in which a car can be booked out for business use.

Contractual constraints mean that in addition to terms and conditions of employment prohibiting private use, there should be some form of censure available for the business to bring against an officer or employee who is found to be using the car for a private journey. Typically, this would take the form of a disciplinary proceedings.

It is good practice for companies to develop an employee guide on company car use and require employees to sign the document to demonstrate that they have read and understood the terms.

As a general rule, under Article 7 of the VAT Input Tax order, if correct procedures are in place, then a company can reclaim VAT on the purchase of a pool car if it is strictly for business use only. VAT can also be reclaimed on cars bought for use as a taxi, driving instruction or as a self-drive hire car.

If you are planning to introduce a company car scheme to your organisation, or you already have them in place and would like to review your procedures, contact Andrew Stephenson on 01254 688100.