New rules VAT adjustment for the private use of company cars

Publication date 08 July 2011

The rules on VAT adjustment for the private use of company cars will change as per July 1, 2011. The reason for this change is the decision by the Haarlem District Court rendered on June 1, 2011, on the application of the equality principle (we refer to ourearlier item); the outcome of this decision is not favorable for the tax authorities. Although the Dutch Revenue has lodged an appeal against the decision, the Deputy Minister of Finance does not intend to await its outcome and has introduced new rules.

The new rules will take effect as of July 1, 2011. The VAT adjustment for the private use of company cars is no longer based on the VAT Deduction Exclusion Decree 1968 (“DED”), but directly on the act itself (Section 4 Dutch VAT Act 1968).

The VAT adjustment will no longer be linked to the addition for the private use of a company car applied to payroll and personal income taxes. In addition, the distinction made between employees and business owners/natural persons will cease to exist as per July 1, 2011.

The new rules are based on the assumption that 19% VAT is due on the actual expenses that include VAT, for actual private use of the car, insofar as the VAT on these expenses was initially wholly or partly deducted. Commuting will once again be considered private use as of July 1, 2011, whereas it qualified by Decree as business-related travel as of January 1, 2008. This Decree no longer applies as of July 1, 2011. In the legal system, a taxable person is therefore required to record both the cost per company car and the actual private use per employee.

In order to determine what portion of the expenses relates to the actual private use of a car, the Deputy Minister's Decree states that the taxable person is required to maintain a comprehensive kilometer registration system. The taxable person will need to calculate which part of the kilometers relates to private use of the car, based on this system. This requirement is not incorporated in the relevant legislation, however. Based on the statutory rules, the taxable person may use any evidence available to substantiate both the costs per company car and the private use of the vehicle per employee. Any available evidence of the business-related use will suffice.

In practice, the new rules will be considered difficult to apply. The Deputy Minister has therefore approved the application of a flat rate VAT adjustment. If a flat rate is applied, the taxable person is expected to include an annual percentage of 2.7 of the catalog price (including VAT and Car Registration Tax) of the car in question in its last VAT return of the calendar year. The new flat rate is slightly lower than the previous flat rate adjustment for normal cars, which was 12% out of 25% (=3%) of the catalog price.
Although it has not been explicitly stated in the new rules it would, in our view, be fitting that taxable persons which are not entitled to the full deduction of VAT on general costs should be given the possibility to restrict the lump sum adjustment accordingly.

Other consequences
·        Due to the fact that, as of July 1, 2011, commuting is viewed as private use, taxable persons may once again be faced with a restriction of the deduction of VAT for parking facilities made available to employees who use their own car to commute.
·        The private use of company cars is no longer governed by the DED. As a consequence, this advantage is no longer included in the calculation of the DED-threshold, which amounts to EUR 227 in advantages per person per year.
·        As of July 1, 2011, VAT on public transport passes that are also used for private purposes are no longer invariably deductible, but will be subject to the DED.
·        The VAT car dealer scheme has been repealed, as a result of which the normal rules regarding VAT adjustment for the private use of company cars will apply to car dealers. Up to July 1, 2011, car dealers were able to make use of the payroll tax scheme for VAT adjustment.