An employee’s personal use of a company car raises tax issues
For a long time the Polish Ministry of Finance has been promising to introduce new income-tax rules for employees’ private use of company cars. But so far no new regulations have been adopted, and taxpayers must still operate under the existing rules.
The current regulations do not address separately the issue of an employee’s use of a company car for private purposes (only the issue of an employee’s use of a private vehicle for business purposes is regulated). Thus if an employee uses a company car for personal reasons, the income-tax treatment of the situation is governed by general tax regulations, which often generate doubts.
Moreover, from April 1, 2014, there are new regulations in force concerning deduction of input VAT on the acquisition and operation of motor vehicles. Although the recent changes might appear to affect only VAT, they may nonetheless have an impact on income tax as well.
Using a vehicle for mixed purposes
From April 1, 2014, VAT payers must determine whether a given company car is to be used for mixed purposes or only for the taxpayer’s business.
Using a company car exclusively for the taxpayer’s business purposes is advantageous for VAT reasons, because it permits full deduction of the VAT paid on acquisition and operation of the vehicle. However, this also requires the taxpayer to maintain a travel log for the vehicle (except for vehicles whose construction excludes their use for mixed purposes). Moreover, the tax authorities have announced that they will conduct numerous audits to verify whether vehicles registered for business purposes are truly being used exclusively for business purposes. For this reason as well, the taxpayer should continually monitor the manner in which company cars are used by employees (for example where the cars are garaged outside of the employer’s business hours or on days off).
In order to reduce these burdens, VAT payers may decide that a company car is going to be used for mixed purposes. In that case, they can deduct only 50% of the input VAT on invoices documenting the acquisition and operation of the vehicle.
When it is assumed for the sake of VAT that a company car is going to be used for mixed purposes, it may raise doubts in the area of income tax. This is because the tax authorities may claim that if the taxpayer has accepted that the company car is to be used for mixed purposes, this means that the vehicle is being used for the employee’s private purposes, and thus the employee should report taxable income from his or her use of the car for personal reasons.
It could be countered, however, that it is incorrect to automatically carry VAT rules over to income tax in this manner. The taxpayer may assert in its defense that it decided to treat the company car as being used for mixed purposes solely in order to avoid the additional obligation of maintaining a log of the use of the vehicle. And, it should be pointed out, according to the justification for the act introducing the new VAT regulations, the use of a company vehicle for mixed purposes refers not only to actual use of a company car for the employee’s private purposes, but also potential use of the car for private purposes. Thus the taxpayer could argue that because monitoring compliance with the use of company vehicles for business purposes would require inordinate effort and additional expense, the taxpayer decided to merely assume that the vehicles could be used for mixed purposes.
Paid or unpaid private use of company car?
If a company car is in fact used for an employee’s private purposes, there are two possible models for settling this use between the employer and the employee.
First, the employee may use the company car privately for free, without paying anything to the employer. This approach generates imputed income on the side of the employee for receiving a gratuitous benefit (which the employee would normally have to pay for). This imputed income should be estimated and added to the tax basis for the employment relationship and then income tax should be withheld on such additional income (and thus the additional income tax will be a true cost to the employee).
But this approach generates a tax risk for the employer. Under recent interpretations by the tax authorities, there is a risk that the employer will be allowed to deduct as a revenue-earning cost only the portion of its expenditures connected with use of the vehicle for business purposes. The portion of expenditures concerning private use of the vehicle would not constitute revenue-earning costs because they are not related to the employer’s revenue. Moreover, free use of a company car for the employee’s private purposes may generate a tax risk for the employer with respect to the employer’s ability to take a revenue-earning cost for depreciation of the company car.
Alternatively, the employee may use a company car for private purposes for a fee, e.g. on the basis of an agreement for lease of the car, under which the employee pays the employer rent for private use of the car. This approach is favorable for the employer, because when the car is provided to the employee for private use for a fee, the employer may deduct all of its expenditures connected with the vehicle as revenue-earning costs.
Which solution to select?
The use of company cars by employees should be properly regulated and settled by the employer in terms of both VAT and income tax.
Selection of a fee-paying or free model for private use of company cars may depend on whether the employees are using new vehicles (i.e. still being depreciated by the employer), leased vehicles, or older vehicles. In each of these models, it is essential to determine the amount of the rent or the tax basis (which is not always easy because the tax authorities no longer accept the use of a rate per kilometer).
Until clear new regulations are enacted in this area, the selection of the model for settling the private use of company cars will always reflect some form of compromise between the interests of the employer and the interests of the employee, with an eye to limiting the employer’s tax risk.
Miejsce publikacji: American Investor, Summer 2014