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Note from the AEAT on issues related to mixed-use vehicles assigned to employees

Baker Tilly 12 September, 2023

New criteria have been established by the tax authorities regarding the provision of vehicles to employees by companies, following analyses conducted by the European Union Court of Justice, the National Court, and the Economic-Administrative Tribunal.

Private use in VAT and income tax

It has been established by the Central Economic-Administrative Tribunal and the National Court that it is the company's obligation to demonstrate that the use of a vehicle is necessary for the employee's work-related activities and that it is not available for their private use.

Once the need for a company vehicle for work activities is proven, and in the case of any private use by the employee, the criteria for determining the employee's private use of the vehicle will be the time it is used outside working hours, affecting both VAT and income tax.

The European Union Court of Justice affirms these availability rules, stating that the vehicle is available for private use, whether by the worker, employer, or a third party, regardless of whether the vehicle is in use.

The criteria for availability for private use is determined based on the total number of days in a year that are not related to work activities. This includes weekends, holidays, vacations, and hours outside the regular workday. Previously, companies typically attributed private use only to weekends. To prove vehicle, use for work, companies can use exceptions in various collective agreements and consider the specific nature of the work being performed as each activity will have different appreciations.

Provision of vehicles by the employer for VAT purposes as an onerous or gratuitous supply

The European Union Court of Justice considers the provision of a vehicle to be a provision of services subject to VAT when it is provided for consideration. In the relationship between the worker and the employer, the provision of a vehicle is considered onerous, and therefore subject to VAT when:

  • The worker pays for the use of the vehicle.
  • The worker's salary is reduced due to the use of the vehicle.
  • The worker must choose between using the vehicle or receiving a higher monetary amount.

The use of a vehicle by an employee is not always considered an onerous benefit. It is considered gratuitous and therefore not subject to VAT when:

  • The use of the vehicle is voluntary for the employee, and its use or non-use has no economic impact.
  • The employee does not have to pay anything, or when choosing to use the vehicle, they cannot choose another economic benefit.

In summary, there is an onerous supply of services subject to VAT when the worker pays a fee to the employer for using the vehicle, regardless of whether it's paid in money or by giving up other economic benefits.

Deductibility for the employer or professional of VAT paid on vehicles

VAT regulations allow for the deduction of VAT paid on the acquisition, import, leasing, or other forms of vehicle use when it is used in professional or business activities. Typically, the deduction is 50%, but a different deduction percentage can be accepted if it can be proven, possibly even up to 100%.

Adjustments to the deduction depend on the extent of vehicle use in business activities.

  • In cases where the vehicle is entirely used for business purposes, a 100% deduction is allowed.
  • If the vehicle is exclusively provided for an employee's private use, it is subject to VAT at the standard rate and is not exempt.

In the case of mixed-use, where the vehicle is used for both work and employee use, there are two scenarios:

  • If there is no consideration (as discussed earlier) for the provision of the vehicle to the employee, the vehicle's VAT deduction is partial, often 50%, unless the tax authorities apply a lower percentage.
  • If there is consideration for the provision of the vehicle, the vehicle is considered for economic activities, and the deduction is based on the proportion of business use. If the employee exclusively enjoys the vehicle privately, that proportion is subject to VAT and not exempt.

It's the responsibility of the employer or professional to prove the deductible portion of the VAT paid. Any legally accepted method of proof is valid, but invoice registries of received invoices are not considered valid proof. The tax authorities may lower the deduction percentage based on the availability criterion discussed earlier.

Self-Consumption of services

In cases where, after applying the deduction, the vehicle's use is altered by providing it without consideration, the employer or professional will have to pay tax on this as self-consumption of services. This prevents professionals or business owners from avoiding VAT by allocating a good or service for private needs, ensuring equal treatment among consumers.

Determination of the tax base for VAT and income tax

The determination of the tax base for VAT and income tax differs.

Regarding VAT, a distinction is made between:

  • When there is a provision without consideration, there is no taxable event, unless it constitutes self-consumption of services, which prevents deduction in the VAT paid on the acquisition.
  • If it's an onerous provision, it's subject to VAT, and the tax base corresponds to the market value.

For income tax, the withholding base, in case of use, is 20% of the annual acquisition cost for the payer, including the taxes related to the transaction. If the vehicle is not owned by the taxpayer, the 20% is applied to the market value that would correspond to the vehicle if it were new.

It should be noted that this valuation rule applies when the private use is 100%, so it should be adjusted based on the availability percentage for private use.

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