Free car use and VAT

Service-Tax

Passenger cars are a component of almost every enterprise and are used to perform taxable activities. In the case of a paid supply of goods or the provision of services for passenger cars, there is no doubt that such sale is subject to VAT. But what if the passenger car is used free of charge? In this case, is it also necessary to pay tax on goods and services for free use of the car?

Free use of the car in the light of VAT

As a rule, the provision of services against payment is subject to taxation. The VAT Act, however, provides for a situation where tax must also be paid on the free provision of a service. According to Art. 8 sec. 2 points 1 of the Act, the use of goods constituting part of the taxpayer's enterprise for purposes other than the taxpayer's business activities, in particular for the personal purposes of his or her employees, including former employees, partners, shareholders, shareholders, members of cooperatives and their household members, members of legal entities, members of an association, if the taxpayer was entitled, in whole or in part, to reduce the amount of tax due by the amount of input tax on the acquisition, import or manufacture of these goods or their component parts.

As can be seen from the above definition, the free use of a passenger car for private purposes is a taxable activity, provided that the taxpayer was entitled to deduct input tax when purchasing or manufacturing the car. As a result, if there was no right to deduct the input tax on the purchase of the vehicle, then the tax obligation would not arise.

Therefore, taxation of the free use of a passenger car depends on the following conditions:

  • The motor vehicle is part of the taxpayer's business.

  • The car is used for purposes other than the taxpayer's business, in particular for the personal purposes of any person.

  • Putting into use is free of charge.

  • For the purchase of a passenger car or its component parts, the taxpayer was entitled to deduct input tax in whole or in part.

Example 1.

A taxpayer conducting medical activity purchased a passenger car. Due to the fact that the medical activity is exempt from tax, the taxpayer was not entitled to deduct input tax on this acquisition. The taxpayer lent his wife a car for her private purposes free of charge. Such action will not result in the necessity to pay VAT.

Example 2.

The taxpayer purchased a passenger car and deducted the input tax on this acquisition. As part of establishing business contacts and in order to gain a new client, he lent the car to another contractor. In this case, it can be assumed that the car was used for purposes related to its business activity, which means that no obligation to pay the tax will arise.

It should also be noted that if the purchase of the car itself did not give the right to deduct the tax, but this right was due to the purchase of components for this vehicle, the free use of the car is a taxable activity. However, this does not result in the need to tax the private use of the entire car, but only the component parts.

In addition, it should be noted that if the taxpayer had only a limited right to deduct input tax on the purchase of a passenger car, then transferring it for free use will not result in the obligation to tax such a transaction. This is stated in Art. 8 sec. 5 of the VAT Act, which relates directly to the limitation in deducting input tax of 50% in the use of this vehicle for private and business purposes. This is stated in Art. 86a of the VAT Act.

Example 3.

A taxpayer running a business has purchased a passenger car, which he intends to use for both corporate and personal purposes. The taxpayer deducted 50% of the input tax on account of the purchase of this car. If the car is handed over for private use, free of charge, there will be no obligation to pay VAT.

The taxable amount for lending a vehicle free of charge

If we determine that the free lending of a vehicle for purposes other than business activity will result in the obligation to tax this activity, the tax base on which the output tax will be calculated should be determined. In the case analyzed by us, the tax base is the cost of providing the service in question incurred by the taxpayer. The Value Added Tax Act does not provide guidance on how to determine such a cost. Common practice has developed a method that consists in calculating the cost of the service as an appropriate part of the depreciation charge, increased by the current operating expenses during the period of making the vehicle available.

Example 4.

In the enterprise, the monthly depreciation charge for a passenger car is PLN 1,000. However, the monthly cost of insurance, repairs and operating expenses is PLN 200. The company lends its employee a free car for his private use for 10 days a month. The tax base is therefore 10/30 x (1000 + 200) = PLN 400. The company has to pay 23% tax on this amount.

Documenting the free lending of the vehicle

In accordance with the currently applicable regulations, the free service does not have to be documented with an invoice. As a result of the changes made in the regulations, the institution of internal invoices does not function at present. It is also worth emphasizing that when the service is provided to a natural person not conducting business activity, there is also no obligation to issue a receipt. The activities performed free of charge are exempt from the obligation to register at the cash register.