tax advisor, Junior Tax Manager at RSM Poland
Full deduction of input VAT from the purchase and use of a vehicle is possible, among others, when a taxpayer uses such vehicle exclusively for own business purposes. To prove that the use of a car is limited only to the abovementioned, the taxpayer must keep a mileage log. And here are the proverbial „stumbling blocks”. Although the VAT Act indicates how such mileage log shall be kept and which specific columns shall it include, the taxpayers concerned see these guidelines differently than tax officials.
Meters under control
For obvious reasons, tax authorities take a restrictive stand in this respect. In their opinion, the mileage log shall detail each “centimetre” driven. Let’s study the following example: The taxpayer’s employee drove to a bank 1150 meters from the company’s head office – it has to be recorded in the log. Next, the employee drove from the bank to a post office – also to be recorded. Then, he drove to the tax office and finally, before he came back to the company’s head office, the employee dropped into a stationery wholesaler’s – each route section has to be recorded together with addresses of all the points visited by the employee and the number of kilometres driven. What is more, according to tax authorities, such drive shall not be recorded in the mileage log as one single „route”, with its starting point and destination point in the company’s head office and collective number of kilometres driven in a day. Each route section shall be included in a mileage log with a separate record.
Deducting 100% of VAT may turn out to be a challenge that requires a car user to have an „iron discipline”. In reference to the above example, the employee, before driving to a bank, should record the odometer reading. Next, after arriving at the final destination, the employee should repeat the same procedure. Such algorithm should be applied to each and every distance driven. Woe to those employees who forget to look at the odometer! Once such a terrible mistake is made, if willing to proceed in accordance to the tax office’s standpoint, the employee should recreate the route on one of the online maps, in order to determine the number of kilometres driven between individual intermediate points. Doesn’t it seem a bit time consuming?
Taxpayer – a pharmacist and chronologist in one
The treasury is not the only supporter of a pharmacist's precision in keeping the records. Recently, the Voivodeship Administrative Court (WSA) in Rzeszów (the judgment of 3 February 2015, file ref. no I SA/Rz 1073/14) agreed with the tax authority, but, at the same time, presented a slightly different concept. According to the Court, including such a general route description: „company’s office – company’s office”, or specifying only the city where the company’s office is located, is unacceptable, because: “it’s easy to imagine that a taxpayer indicating only the city of departure and arrival, (…) and the final destination, without specifying the exact places visited on the way to the ending point, could easily enter any number of kilometres driven, hiding the private use of a car, which information, in case of tax control, could not be verified in any way, especially after a certain period of time”. Having fewer or more reservations, one can still understand the Court’s position. A different approach could be some kind of an open invitation to fraud, but the issue of perceiving taxpayers as potential tax cheaters is a different story, and a good topic for a separate blog post. What is interesting, despite the fact that the Court rejected the taxpayer’s argument and thus upheld the issued tax ruling, contrary to the tax authority, the Court found that it is not necessary to break a drive down into route sections that are separately entered into the mileage log, and considered it enough to have one single record with the details of the route (e.g. intermediate route points) in the log. It seems a cassation appeal is being prepared… Nevertheless, the tax ruling was not rejected and so, the position that requires taxpayers to possess chronicler’s skills was again confirmed. Is that the right way to go? Actually, maybe by multiplying the recording requirements and setting a high degree of detail to be recorded, tax authorities want to fight with fraud, or rather „gently” suggest that there is another, much easier solution called „50% VAT deduction”?
In an attempt to answer the above question, one shall consider the following example: let’s imagine a VAT inspection on a taxpayer, for the period of one tax year. The company owns a dozen of cars and they deducted 100% VAT from each of the cars. Since the taxpayer is a model to be followed and has always applied all recommendation given by the tax authority, the mileage log has been kept documenting each meter driven. Every drive of any car and all the intermediate points were documented in detail, with exact addresses, kilometres etc. Altogether a couple or a dozen thousand of extremely detailed entries in the log… Now let’s imagine tax officers getting down to the review of the mileage log that is prepared in such a way – their task is to verify its veracity. One thing is certain – this is quite a challenge. To all who feel ready to accept this challenge: How, even equipped with such detailed data, one can prove truthfulness of the number of kilometres included in the mileage log since there is a whole variety of ways that can be chosen to commute from point A to point B, and thus, the variances in the number of kilometres driven may be huge? Furthermore, there might occur certain circumstances that could justify a choice of alternative routes (i.e. a road repair, traffic, a car crash). Should such circumstances be also included in the log?
Considering the economy of tax proceedings, tax authorities are now shooting themselves in the feet. The question is whether they are aware of all this.
We can only hope that, in the name of fight against fraud, the treasury will not come up with the idea of a special state inspector who will accompany a taxpayer on each drive (in the vehicle from which it is possible to deduct 100% of VAT), note everything down, and finally, for whose work nobody else but the taxpayer will certainly have to pay.