Company vehicles also for private use: VAT and PIT implications

1. Private vehicle use

The AEAT analyses the private use of vehicles so that, once this is determined, the business use of vehicles can be calculated, for which it establishes the following principles:

It is up to the company to prove:

• That the vehicle is necessary for its activity
• That the vehicle is not available for private use
• The rules for proving necessity and use for the company's activity are the same for VAT and personal income tax purposes.

If, once the need for the performance of the work activity has been proven, there is a private use, this will be determined by the availability of the vehicle for private use, understood as the total annual time that does not correspond to the employees' working day according to the applicable collective agreement and adjusted by the characteristics of the company's activity and the peculiarities of each job.

Therefore, the criterion to be followed for the purposes of determining private use is that of availability and not that of actual use.

2. Impact of VAT on the transfer of the vehicle to employees

Secondly, the AEAT analyses whether the transfer of the vehicle is onerous or free of charge, so that, if it is onerous, it will be subject to VAT and the company will have to pass this tax on to the employee. The Agency points out that the fact that the transfer of the vehicle is considered to be payment in kind does not directly imply that it is a transfer for consideration for which VAT must be charged.

Thus, the Tax Administration considers the transfer to be onerous when:

• The employee pays for the use of the vehicle or the amount corresponding to that use is deducted from his salary.
• The employee chooses the use of the vehicle from among various forms of remuneration.

And free of charge when:

• The use is voluntary for the worker and the fact that he opts for it has no repercussion on his remuneration.
• When the employee does not make any payment, does not use part of his remuneration in cash and does not choose between different forms of remuneration.

3. Deduction of input VAT

Once it has been determined whether or not the assignment for private use is subject to VAT, the AEAT reviews the deductibility of the VAT borne.

The AEAT points out that a vehicle is an investment good and therefore its deductibility must be in accordance with the rules laid down for this type of good: presumptions of deduction, 50% or 100% depending on the type of vehicle in question, and adds that they must be regularised when it is accredited that the actual degree of use is different from that applied.

Thus, the following deduction alternatives are proposed:

100% deduction:

• If the vehicle is used entirely for the economic activity of the company.
• If the vehicle is used entirely for private use for consideration and VAT is charged.
• If it is a vehicle for which the VAT law presumes a 100% deduction. The AEAT warns in its Note that the Administration may apply a lower percentage of allocation taking into account the aforementioned criterion of availability.
• Mixed-use vehicle in which the assignment to the employee is for a consideration and VAT is charged.

Deduction of 50%:

•  Mixed-use vehicle transferred free of charge to the employee for which a 50% deduction is presumed. Once again, the AEAT reminds that the Administration may apply a lower percentage of allocation, taking into account the availability criterion indicated.

Deduction at 0%:

• If the vehicle is entirely assigned to private use free of charge.

4. Self-consumption operations

The AEAT classifies as self-consumption transactions those in which the company deducted VAT on the purchase of a vehicle and subsequently transfers it to employees without any consideration, i.e. free of charge. In such cases, VAT must be charged. If, on the other hand, the full amount was not deducted because it was considered that it would not be fully allocated to the activity, the subsequent free transfer of the use of the vehicle to the employee will not be subject to VAT.

5. Determination of the taxable income for personal income tax and VAT purposes

Although the degree of availability for private use is the same for VAT and personal income tax purposes, the taxable base for VAT in the case of a transfer for consideration and for personal income tax purposes for determining the taxable income on account do not necessarily coincide, since the taxable base for VAT must be determined according to the rules for related-party transactions and for personal income tax according to its own scales (20% per annum of the acquisition cost or market value, as appropriate).

For the self-consumption analysed in the previous point, the Note provides for the application of the rules for related entities to determine the taxable base, despite the fact that VAT regulations already provide for a specific determination rule for this type of transaction.

In short, this Note shows that:

• The usual practice of companies to impute as private use only weekends (2 days out of 7) is not correct.
• The existence of a remuneration in kind for personal income tax purposes does not imply an onerous assignment for VAT purposes; this will be the case if the employee pays for the use of the vehicle either by paying an amount or deducting it from his or her salary and if he or she chooses from among various types of remuneration.
• The percentage of private use must be the same for VAT and personal income tax purposes, so if a percentage is applied for personal income tax purposes, the same percentage must be applied for VAT purposes, either to determine the amount on which VAT will be due, if it is an onerous transfer, or to modify the VAT deduction if the 50% or 100% presumptions are applied.
• The presumption of the 50% or 100% VAT allocation is therefore questioned.

Apart from the fact that, in our opinion, some of these criteria are still debatable, it remains to be seen how the management bodies will apply this Note: will it only apply to returns filed after the Note is issued or will it apply retroactively to those already filed? will the Administration motivate each case it wishes to regularise?

And from the taxpayer's point of view, should the taxpayer regularise returns already filed or modify the criteria followed after the Note is issued?