It seems completely fair that self-employed persons should be able to deduct a reasonable amount for the use of a car in their businesses.
In this article we explain the problem with the way tax law is written, the resulting difficulties and possible ways to solve the problem.
Despite the fact that income tax law has hardly changed in almost 30 years concerning what can and cannot be deducted from business income, there has been a continuing debate over how vehicle costs should be treated for the self-employed.
In recent years, the tax office frequently refuses the deduction for car expenses in the case of mixed personal and business use.
A recent Supreme Court ruling has finally put an end to the debate.
Note that this article relates only to self employed car use and has nothing to do with cars used by a company. Different tax rules apply.
The cause of the problem – in detail
Unfortunately, the Supreme Court has ruled that no car costs can be deducted when a car is used for both business and personal use.
This problem applies regardless of how well business use is documented.
The argument has been caused by the fact that the text of the law says that a cost cannot be deducted unless it is exclusively for business use.
In other words, a cost that has both a personal and business use element, i.e. mixed use, results in no proportion of that cost being deductible.
The Supreme Court ruled that a vehicle is not physically divisible in two (!) and so the claim for deduction of a reasonable business proportion (however well justified) of car costs cannot be allowed.
Unfair. Yes of course it is.
But that’s the way the law was written, and the Supreme Court has decided that the tax office’s interpretation is right, regardless of the principles of equity or fairness or, lets face it, common sense.
As they say, sometimes the law is an ass. In this case the Judges of the Supreme Court could easily have chosen to interpret the text of the law differently, which says something about them too!
The case of car expenses is different to some other potentially contentious costs, for example a person’s home that is also used for business. Specific rules apply that enable a limited deduction of costs (sadly very limited) in the case of the use of a home for business.
So, a self-employed person is not allowed to deduct car insurance, maintenance, leasing, fuel, depreciation, finance or any other costs related to owning or operating a car that has mixed use.
This decision is all the more galling because under IVA rules, whose rules are often more rigorous than income tax, there is specific provision to claim 50% of IVA paid on car costs where the taxpayer can demonstrate business use. The requirement to justify business use also applies but a tax inspector is at a disadvantage here, because there is a presumption in law of 50% business use, which requires that the inspector makes the effort to disprove business use. They rarely bother.
So, we now have the ridiculous situation of including car costs in self-employed bookkeeping records to claim 50% of IVA on car costs, and then having to cancel those costs for income tax purposes. Mad!
Commercial vehicles, vans etc, due to their nature, are presumed to be tax deductible but, in theory at least, a tax inspector could still cause problems if a person does not have another vehicle for personal use. Beware, especially with dual use vehicles which have become popular having the storage and other characteristics of a van whilst having comfort and removable seating that also makes them suitable for personal use.
Having two vehicles, one for business and one for personal use, is an obvious solution but not feasible for everyone. Indeed, it would be ridiculous to have to buy a second car just to be able to make a claim for business expenses. Not exactly a ‘green’ use of resources.
Sometimes, it is feasible to have two cars, as in the case of a couple where one is self-employed and the other has a job or looks after the home. However, it will still be necessary to justify to a tax inspector the reality of the business travel for the car used in the self-employed activity. It would do no harm, where this is practical, for the vehicle used for business to have a PVC stick on sign that advertises the business activity. These are easy and cheap to organise. Such a photo handed to a tax inspector would have a useful psychological effect, even if not guaranteeing exclusive business use.
Logging business use kilometers
It may seem counter-intuitive, but the door remains open for the time being for a person to claim the actual cost of the kilometres involved with business trips.
Although not directly related to self-employed income tax law, another section of the same law gives employees the right to claim 19 cents per kilometre tax free for the use of their vehicles from an employer. This provides a reasonable argument to present to a tax inspector, always with a schedule describing business trips, detailing kilometres, dates, and purposes of the trips and providing any documentary proof possible to verify the purpose of trips.
The problem is that the 19 cent allowance goes back to the 1990s and is hopelessly inadequate these days. Independent surveys show that the true cost today is between 30-50 cents/kilometre for a modest family saloon.
The option exists, inevitably subject to a possible argument with the tax office, for a self-employed person to calculate the precise cost per kilometre of operating the car in question by adding together all the fixed costs of the car for a year and the fuel purchased, and dividing this total by the number of kilometres the car has been used in a calendar year.
The resulting cost in cents/kilometre can be argued as reasonable costs exclusively expended on business. This may seem a typical accountants solution (we love numbers!) but with a bit of organisation is achievable without too much effort.
This concept is similar to the cost of a taxi for a business trip being deductible.
The difference between this type of cost calculation may not seem dramatically different to a simple overall % business used calculated on the total car, costs but from the perspective of a Spanish tax inspector, this is a more credible calculation. Some tax tribunal decisions have supported this method.
So, keeping a trip log in the car for all business trips could well be the best solution, in the case that the two-car solution is not feasible. We emphasise that this is not a guaranteed solution, but it has worked in the past. Car running costs are already recorded in the business accounts for IVA purposes so there is not a great deal of extra administration required.
A final word….
The question arises as to whether this element of tax law has been drafted, or has been interpreted, in a manner that accords with Spain’s Constitution.
In particular, Article 31.1 states that “tax shall be payable by citizens in accordance with a tax system that is just and inspired by the principles of equality and progressivism”.
Perhaps, this dispute has not yet come to an end and the Constitutional Court will one day rule against this regressive interpretation.
Even better would be for the tax office or business friendly politicians to promote more reasonable tax regulations that are fair to the very substantial self-employed segment of the Spanish economy that generates much of the wealth that pays the salaries of the tax inspectors, politicians and bureaucrats who seem intent to kill the golden goose.