Non-VAT car expenses and tax costs

Service-Tax

From the beginning of 2019, new regulations have been in force regarding the possibility of recognizing expenses related to passenger cars used in the company in tax costs. Although a lot of time has passed since the amendment, there are still many doubts related to the correct settlement of this type of cost. In this article, we will explain whether the expenses for a passenger car at a non-VAT payer can be fully recognized as tax deductible costs.

Non-VAT car expenses as a tax deductible cost

The car is one of the most frequently used assets in the enterprise. No wonder then that taxpayers are very much interested in treating their expenses as tax costs. Let us remind you that correctly recognized cost reduces income, which results in lower taxable income.

The Personal Income Tax Act in Art. 22 sec. 1 gives us a definition of tax costs. According to this provision, tax deductible costs are costs incurred in order to achieve income or to maintain or secure a source of income, with the exception of the costs listed in Art. 23. Although this is a very short definition, on its basis we can indicate several important elements that must be met in order for a specific expenditure to be considered a tax expense.

The doctrine has emphasized many times that in order for an expense to become a tax cost included in the tax settlement, the following conditions must be met:

  • it must be causally related to the income or source of income, and must be incurred in order to achieve the income or to preserve or secure the source of income;

  • may not be on the list of costs not recognized as tax deductible costs referred to in article 1. 23 sec. 1 of the PIT Act;

  • it must be incurred by the taxpayer and be definitive;

  • must be properly documented.

Note that one of the conditions says that the analyzed expenditure should not be included in the negative catalog specified in Art. 23 sec. 1 of the PIT Act. For if it is listed on the list in this article, even despite the fulfillment of the other conditions, we cannot speak of a tax deductible cost.

Pursuant to the Amendment Act of 23 October 2018, the provisions on the principles of recognizing operating expenses related to a passenger car in tax deductible costs were changed. New regulations in this area entered into force on January 1, 2019.

It is about the newly added Art. 23 sec. 1 point 46a of the PIT Act, which states that 25% of the expenses incurred are not considered tax deductible costs, subject to point 36, for the costs of using a passenger car other than that specified in point 46, for the purposes of the taxpayer's business activity - if the car personal data is also used for purposes unrelated to the business activity conducted by the taxpayer.

In the light of this provision, in the case of a passenger car used both for business and private purposes, the taxpayer may recognize all expenses related to the use of this vehicle as tax deductible in the amount of 75% of the expenditure. However, if the entrepreneur wants to settle 100% of car expenses, the car must be used only for company purposes.

In terms of income tax, there is a limit to the possibility of exposing expenses related to passenger cars, which are used both for the corporate and personal purposes of the taxpayer, in the costs.

However, it should be noted that the possibility of full deduction of the said expenses depends also on one more condition. As we can read in Art. 23 sec. 5f of the PIT Act, in the event that the taxpayer does not keep the records referred to in art. 86a paragraph 4 of the Value Added Tax Act, it is considered that the passenger car is also used for purposes not related to the taxpayer's business activity. As a result, the use of the vehicle only for business purposes must be confirmed with appropriate records, as provided for in the VAT Act.

Pursuant to the quoted Art. 86a paragraph 4 of the VAT Act, motor vehicles are considered to be used only for the taxpayer's business activity, if the manner of using these vehicles by the taxpayer, in particular those specified in the rules of their use, additionally confirmed by the taxpayer's mileage records for these vehicles, excludes their use for the purposes of not related to business activity.

The circumstance of using a passenger car only for the purposes of conducted business activity must be additionally confirmed by means of a vehicle mileage register used under the tax on goods and services.

Expenditure on a passenger car with a non-VAT vehicle and a register of vehicle mileage

The problem that is the subject of our analysis concerns those taxpayers who want to use a passenger car only for business purposes and, therefore, recognize 100% of their expenses as a cost, but at the same time benefit from VAT exemption (subject or objective).

The above issue is problematic because the amended act does not address such doubts at all. On the one hand, there is Art. 23 sec. 5g of the PIT Act, which states that the provisions of para. 5f shall not apply if the taxpayer is not obliged to keep such records pursuant to the provisions of the act on tax on goods and services, except in the case where the lack of this obligation results from art. 86a paragraph 5 point 2 lit. a of the Value Added Tax Act.

However, on the other hand, let us pay attention to the circumstances of the exclusion from the obligation to keep records indicated in Art. 86a paragraph 5 point 2 of the VAT Act. This provision stipulates that the condition of keeping a register of vehicle mileage does not apply to motor vehicles in respect of which:

  1. the amount of input tax on related expenses the taxpayer calculates in accordance with art. 86a paragraph 1 (i.e. the taxpayer only deducts 50% of input tax from each expenditure) or

  2. the taxpayer is not entitled to reduce the amount of tax due by the amount of input tax on related expenses.

Cited Art. 23 sec. 5g of the PIT Act refers to lit. a, while the case considered by us was listed in point (a). b.

Going for a moment to the content of the VAT Act, let us note that in accordance with its Art. 86 sec. 1 to the extent that the goods and services are used to perform taxable activities, the taxpayer referred to in article 2. 15, has the right to reduce the amount of tax payable by the amount of the input tax, subject to article 22. 114, art. 119 paragraph. 4, art. 120 paragraph 17 and 19 and article. 124.

However, in accordance with the quoted Art. 86a paragraph 5 point 2 lit. b of this act, the condition of keeping records of the mileage of the vehicle does not apply to motor vehicles in respect of which the taxpayer is not entitled to reduce the amount of tax due by the amount of input tax on related expenses. This means that a taxpayer exempt from VAT, who does not have the right to deduct input tax because he does not perform taxable activities, does not have to keep records of the vehicle's mileage.

Thus, when analyzing the above provisions, we come to the conclusion that there is a certain contradiction. On the one hand, the PIT Act states that the use of a vehicle only for business purposes must be confirmed with a vehicle mileage record, while the VAT Act indicates that a taxpayer exempt from VAT is not required to keep such records.

Tax interpretations issued under the new regulations can help in explaining this problem. As we can read in the interpretation of the Director of the National Tax Information of May 24, 2019, No. 0113-KDIPT2-3.4011.264.2019.1.PR, and of June 10, 2019, No. 0112-KDIL3-3.4011.138.2019.2.AA, a taxpayer who uses a passenger car only for business activity and at the same time is not an active registered taxpayer of value added tax, and therefore is not required to keep a record of the mileage of the vehicle, may include 100% of expenses related to the use of such a vehicle as tax deductible costs.

Example 1.

The taxpayer runs an accounting office and in the scope of the services performed, he benefits from the subjective exemption from VAT pursuant to art. 113 paragraph. 1 of the act. He uses a passenger car for the purposes of his business. The car is used exclusively for business purposes. Since the taxpayer is not an active VAT taxpayer, he is not obliged to keep records of the vehicle mileage. However, this does not exclude the possibility of including 100% of expenses related to this vehicle in tax costs.

Taxpayers exempt from VAT may include in tax costs the full value of the expenditure incurred in connection with the use of the vehicle only for this activity. In this case, there is no need to keep a record of the vehicle mileage, as provided for in the VAT Act.

Moving on to the summary, as can be seen in the presented case, there is indeed a large gap in the regulations, which, unfortunately, do not provide an answer to the emerging doubts. Certainly, the right solution would be to introduce amendments to the act in this regard, however, currently taxpayers can only count on positive individual interpretations in this regard.