Based on a decree, the system of calculating the amount of deducted VAT incurred on costs related to company cars needs to be adjusted because private use of these cars is in practice usually based on how green the car is.
A Dutch lower court has stated that the amount of pollution produced by a car is not a criterion for determining the level of private use of that car. Therefore, this system wrongfully treats equal cases differently. The court added that this means that the favourable calculation method, applicable to less polluting cars, can be applied for calculating the adjustment for all cars.
The Dutch State secretary of Finance, Frans Weekers, was quick to announce that the Dutch tax authorities will appeal this decision. Because of the financial significance of the outcome of this case, Weekers also announced that the VAT adjustment system for private use of company cars will be amended from July 1 2011.
If these plans are adopted, this will apply from July 1 2011:
· In principle, all input VAT incurred on costs relating to company cars is deducted;
· VAT will become due on the actual private use at the end of the book year. Taxpayers will be allowed to apply a fixed adjustment based on a percentage of the catalogue value of the car. The exact percentage will be announced before July 1; and
· To avoid businesses charging a low consideration for private use on which VAT would be due instead of on the actual private use, rules will be implemented under which the VAT due on private use will be calculated on the open market value of the use and not the lower consideration.
These measures will have a great impact on many businesses in the Netherlands, not only because any adjustment of the VAT system requires businesses to adjust their administrative systems, but also because it may affect the VAT adjustment system for the private use of other goods and services as such.
Under the system now, in principle all input VAT incurred on goods and services that are also used privately is fully deductible and an adjustment only needs to be made if the costs of private use are more than a threshold of €227 ($327) per person a year. In that case, the VAT attributable to the private use by that person cannot be deducted at all. If the costs of private use of cars will no longer be included in the calculation of this threshold, it could be that for many businesses the threshold will no longer be exceeded.
It is also noteworthy that not everyone agrees that charging output VAT on private use of services purchased from third parties, f or example, the lease of company cars put at the disposal of employees, is at all possible.
Jeroen Bijl (jeroen.bijl@nl.pwc.com) is a senior manager in indirect tax for PwC in Amsterdam
