As we briefly mentioned in a previous article, the final VAT return of the year must include the adjustment for the private use of a passenger car. If the car is included in the business assets for VAT purposes, all VAT charged on the car (and related costs) may be deducted during the year (assuming that only VAT-taxable supplies are made). In the final return for each year, this deduction must be adjusted to the extent that it relates to the private use of the car.
In the vast majority of cases, this private adjustment is made on the basis of approval from the State Secretary for Finance. This means that the private adjustment amounts to 2.7% of the car’s list price. The adjustment is reduced to 1.5% of the list price where:
– no VAT was deducted in respect of the purchase of the car;
– from the fifth year following the year in which the business owner first took the car into use.
Before 1 July 2011, the VAT adjustment for the private use of passenger cars was linked to the adjustment for payroll and income tax. The removal of this link mainly affects cars for which no or a reduced additional tax percentage applies under payroll and income tax. For example, for a car to which a zero additional tax rate applies for the purposes of the payroll and income tax adjustment, the VAT adjustment was also zero. From 1 July 2011, a VAT adjustment of 2.7% (or 1.5%) of the list price must be applied to this car.
Under the current rules, there is only one way round this: to make use of the main rule, from which the approval described above constitutes a derogation. That main rule is that the VAT adjustment for private use is calculated on the basis of:
– the VAT actually deducted in respect of the car
– and the actual number of private kilometres driven by car during the calendar year.
However, this does require a mileage log showing how many business and private kilometres, respectively, have been driven by car in a year. Whether this results in a lower VAT adjustment than an adjustment based on the approval depends on the specific circumstances. It is also important to note that all kilometres driven as part of the journey between home and work are classified as private kilometres for VAT purposes, whilst these kilometres may be accounted for as business kilometres for the purposes of payroll and income tax.
If, for VAT purposes, the car is classified as part of the entrepreneur’s private assets, VAT deduction is, of course, not an option. Despite the car being classified as a private asset, it is permitted to include the costs of the car in the business assets for VAT purposes. The VAT charged on those costs is then deductible, but naturally the adjustment for private use described above must be made (either based on the general rule or the approval, as appropriate).
The above naturally also applies where a passenger car is made available to an employee. In such cases, however, the employee often makes a contribution in respect of their private use of the car. Such a contribution is subject to VAT. This VAT must be paid from the employee’s own contribution in each tax return period. Insofar as the personal contribution is subject to VAT, there is, of course, no need to adjust the deduction of VAT charged on the car (or car-related costs).