Tax treatment of mixed-use vehicles leased to employees

The Tax Agency, due to multiple interpretations, has been obliged to publish an informative note on issues relating to vehicles acquired or leased by companies and which are of mixed use (company use and personal use) assigned to employees, thus taking a position on this type of situation, which is becoming increasingly widespread in Spain. The matter has been analysed by the Court of Justice of the European Union (CJEU), by the National High Court (AN) and by the Central Economic-Administrative Court (TEAC), which has led to a change in some of the criteria that, until now, had been applied by the Tax Administration.

 

The transfer to the employee of a company vehicle that is also used for private purposes has tax implications for the company, both in terms of the employee’s personal income tax withholdings and in terms of the deductibility and repercussion of the corresponding VAT payments.
This situation raises some doubts as the employee uses the car not only for work-related matters, but also for personal matters outside working hours. This transfer, even if only partial, will be considered as remuneration in kind on which the employer is obliged to make the corresponding payment on account of the employee’s personal income tax.

 

1. INTERPRETATIVE CRITERIA FOR MIXED-USE VEHICLES

The following criteria should be taken into account when assigning a mixed-use vehicle to an employee:

 

1.1 The criterion of availability for private use.

It is up to the employer to prove the necessity of the use of the vehicle for the employee to carry out his professional activity. It is also for the taxable person to prove that the vehicle is or is not available for private use.
Once these terms have been clarified, the applicable criterion, both for VAT purposes and for personal income tax withholdings, will be to determine the percentage corresponding to the use for work purposes and for private use. This criterion of availability for private use makes it possible to determine the degree to which the vehicle is used for company business. It is determined by taking into account the working hours foreseen in the collective agreement applicable to the company and the time available to the workers, specified in weekends, public holidays, holidays and the hours outside the working day, on working days.

 

1.2 Whether the transfer of vehicles by the employer for VAT purposes is to be considered as a supply for consideration or free of charge

It is important to know whether the transfer of the vehicle is for consideration because, in this case, it would be subject to VAT, as the transfer of vehicles is considered as a supply of services. The supply of goods or services by the employer or professional to an employee, for the transfer of the vehicle, will be classified as a transaction for consideration when any of these four circumstances apply:

 

• The employee makes a payment for this transfer.
• The employee uses part of his monetary remuneration, which is deducted from his salary, in exchange for the benefit granted.
• The worker chooses between different advantages offered by the employer by virtue of an agreement between the parties, so that the choice of one of these advantages entails the renunciation of a part of his remuneration in cash.
• A certain part of the work provided by the employee, which can be valued economically, can be considered as consideration for the good or service received from the employer because it is expressly provided for in the employment contract or ancillary document.

In the case of the transfer of vehicles, we will be dealing with an onerous transfer when:

• The worker pays for part of 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.

If the transfer of the vehicle to the employee is a supply of services for consideration, because there is a payment or consideration in return, it will be a transaction subject to VAT. In these cases the employee will pay a rent to the employer for the transfer of the vehicle, either in cash, advantage or waiver of economically assessable rights. In most cases, the company will have to charge VAT on the transfer of vehicles to employees who use them, in addition to their business activity, for their private use, and they will be obliged to pay this VAT, whether or not they receive it from the employees.

The transfer of use is free of charge when:

• The use of the vehicle is voluntary for the worker and, furthermore, whether or not the employee avails himself of this option has no repercussion whatsoever on his remuneration.
• Where the employee does not make any payment or use any part of his remuneration in cash, nor does he choose between various benefits offered by the taxable person in accordance with an agreement between the parties, whereby the right to use the company car is linked to the waiver of other benefits.

In such cases, where the supply is free of charge, no VAT is to be charged.

 

1.3 Deductibility by the entrepreneur or professional of input VAT on the purchase, lease or other transfer of use of vehicles

Vehicles or means of transport are considered to be capital goods. If these goods are used for the taxable business activity, the rule of deductibility applies to the input tax on the acquisition, importation, leasing or transfer of use of these goods.
The VAT charged by the business on the transfer of the vehicle also affects the deduction of the input VAT incurred by the business when acquiring or leasing the vehicle.
The right to deduct is recognised on the basis of the extent to which the goods are actually used in the course of the business activity. When it is proven that the vehicle is fully and exclusively used for the activity, 100% of the VAT deduction can be made , i.e. the full VAT deduction on the amount paid at the time of purchase. If the administration proves that the vehicle is used for less than 50% of the input VAT, this percentage must be applied when deducting the input VAT, without prejudice to the fact that it is the taxable person himself who must make the adjustment, upwards or downwards, in a period subsequent to that in which the input VAT was borne.
As to whether or not the business should charge VAT on the transfer of the vehicle to the employee , it will be necessary to find a fair way of taxing the benefit that employees derive from the use of these vehicles for private purposes.
In most cases, the company must charge VAT to employees when they use the vehicle for personal purposes as well as for work purposes, as this is considered to be consideration for the work provided. In these cases the company must pay VAT. If the company is going to charge VAT on the transfer of the vehicle to the employee (not free of charge) the input VAT is 100% deductible. If no VAT will be charged (free transfer) and the vehicle will also be used for the business activity, the company will be able to deduct at least 50% of the input VAT.
A very important point to note is that if there is no minimum business use, the VAT is not deductible at all.

 

1.4 Self-consumption of services

For VAT purposes, self-consumption of services is considered to be the performance of any of the following transactions without consideration:

• Transfer of rights over business or professional property to personal assets.
• Use of professional and business resources for personal purposes outside the activity.
• Provision of services free of charge to third parties.

When the employer has deducted the VAT paid on the purchase of the vehicle and, subsequently, a transfer to employees takes place in which there is no onerousness, this is considered to be a transaction assimilated to a supply of services.
If the taxable person acquired the vehicle with the intention of partially using it for the activity and also transferring it free of charge to the employee from the time of acquisition, only the percentage used for the activity will be deductible from the input tax, while the rest of the input tax will not be deductible, and therefore there will be no self-consumption of services subject to the free transfer of the vehicle to the employee, as there is no right to deduct that percentage.

 

1.5 Determining the taxable base for personal income tax purposes

According to the latest criteria established by the Spanish Tax Agency (AEAT), when a company vehicle is used both for work purposes and for personal use outside working hours, it is considered remuneration in kind and is included in the employee’s salary, paying Personal Income Tax (IRPF) and paying Social Security contributions.
There are different scenarios for calculating this remuneration in kind, understood as the time that the vehicle is at the employee’s disposal for private use:

 

• Delivery of the vehicle to the worker: The cost of acquiring the vehicle and the taxes associated with its purchase are included in the payroll as remuneration for work in kind. It should be borne in mind that remuneration in kind may not exceed 30% of the total annual salary received by the worker.
• Use of the vehicle by the worker without acquiring ownership: If the vehicle is owned by the company, the remuneration in kind is 20% per year of the acquisition cost of the vehicle, without taking into account its depreciation; if it is not owned by the company, it will be 20% per year of the market value of the vehicle if it were new.
• Use of the vehicle by the worker with subsequent delivery: During the period of use, the remuneration in kind is 20% per year of the market value if it were new; if there is subsequent delivery to the worker, the market price of the used car at the time of delivery is considered, taking into account the previous use.

If the vehicles are energy efficient, the following reductions may be applied:

• Vehicles with CO2 emissions not exceeding 120 g/km and with a market value that would correspond to the vehicle if it were new, before tax, not exceeding EUR 25,000: 15%.
• Hybrid vehicles or vehicles powered by internal combustion engines provided that the market value that would correspond to the vehicle if it were new, before tax, does not exceed 35,000 euros: 20%.
• Battery electric vehicles (BEV), extended range electric vehicles (E-REV); or plug-in hybrid electric vehicles (PHEV) with a minimum range of 15 km provided that, in this case, the market value that would correspond to the vehicle if it were new, before tax, does not exceed 40,000 euros: 30%.