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Is The Renting of My Vehicle Deductible If I Am a Self-employed?

Deductible expensesGood practicesTax Agency (Hacienda)

Is The Renting of My Vehicle Deductible If I Am a Self-employed?

You are self-employed. Your bank offers you an irrefutable offer of renting a vehicle, with all the services included, without worrying about anything and deductible…¿What do you mean, deductible? Can I deduct my renting fee by 100%? Be very careful with those advertisements because that deduction has many nuances!

Our intention with this article is to give you all the information you need to decide for yourself and assess whether or not you can deduct your rental fees.

To make this analysis, I have started from a binding consultation of the DGT (Dirección General de Tributos) of 2020, specifically from the 4th of February (V0233-20). In this case, a press photographer asks if the quotas for a vehicle rental that he needs to carry out his activity can be deductible.

The renting fees are made up of 2 amounts, the taxable base (deductible for income tax) and the VAT (deductible for VAT). For this reason, it is necessary to analyse deductibility differently for personal income tax and VAT. 

VAT Deduction

In the VAT Law, there is a presumption concerning input tax on the purchase of passenger cars: 

“The proportion of 50% shall be presumed to affect the development of business or professional activity”.

However, if you use a vehicle for the development of the following activities: 

1. Transport of goods or passengers.

2. Driving School.

3. Sales representative or commercial agent

4. Surveillance services

…the presumption is as follows:

“These vehicles shall be presumed to be concerned with the conduct of business or professional activity to the extent of 100%.

So, by applying these presumptions to the renting fees, if you carry out any of the activities listed above, you will be able to deduct 100% of the VAT paid. If not, you will only be able to deduct 50%. 

Personal Income Tax Deduction

The Income Tax Law does not use presumptions and is more categorical regarding the deductibility of vehicles. This is the rule we must apply: 

” For the vehicle to be considered as a designated asset element, and therefore for us to be able to deduct the taxable base from the renting fees, it would be necessary for it to be exclusively assigned to the activity”.

But you may ask yourself the following… Suppose I use the vehicle for my activity, and in an accessory and notoriously irrelevant way I use it for personal needs. Can I consider it exclusively for the activity?

I’m sorry to say that the answer is NO. When you speak of exclusive use, you must prove that you use the vehicle only for the activity… and how do you prove that? I will explain it below.

Therefore, only if you use the vehicle exclusively for the activity, will you deduct the taxable base from the rental fees concerning personal income tax. 

“I consider that I use the vehicle exclusively.”

If you are one of the brave people who think that you can prove, in case of verification, that the use of your vehicle is exclusive to the activity, and therefore, you can deduct 100% of the taxable base and 100% of the VAT from the renting fees, write down my advice to be able to defend your argument with certain guarantees.

Proving the exclusive use of a vehicle for the development of the activity is what in the theory of the law is called “diabolical proof” due to its complexity, so the more evidence you can provide, the better:

1. Have another vehicle at your disposal. 

2. That you label the vehicle with the logo or image of your company.

3. That it is a vehicle where you can transport tools and objects related to the activity.

4. You can provide roadmaps of your activity, client signature sheets, and contracts with clients specifying the need for your trips.

5. Include your income invoices items that re-invoice petrol and accommodation costs

6. Provide receipts for tolls, car parks and/or living expenses in other municipalities.

In short, to demonstrate a reality, the reality must be accurate and also to be very methodical with the means of proof. 

What do most self-employed people do?

Most self-employed people take advantage of the 50% VAT presumption, where the Ministry of Finance does not usually object. Still, they do not deduct anything related to the taxable base in the Personal Income Tax.

Yes, I can give you some advice to increase your deductible expenses concerning the vehicle. Still, you must also be very methodical with the means of proof.

What do I do about fuel, tolls and parking?

Suppose you are not sure that you can prove that the vehicle is used exclusively for this purpose. You have chosen to deduct only 50% of the VAT on the rental payments. In that case, you should know that you can deduct 50% of the VAT on fuel and, in certain situations, a little more.

I am going to describe two situations. 

Situation 1: visiting a potential client who does not contract your services.

To make this visit, you have to travel to another city using your vehicle (which is not 100% designated to your activity) and generate the following costs: fuel, tolls and parking.

If you can prove that you have assumed these costs for the visit, you can deduct them 100%, both from your paycheck and VAT. These are the precautions you should take:

1. Try to fill up with the fuel in the city you are visiting, pay by card and ask for an invoice.

2. Calculate the fuel consumption of your vehicle and include this expense as a deductible.

3. Pay the toll and parking fees by card and also ask for an invoice.

4. Keep a document (a card, brochure) of the potential client you will visit.

5. Keep a record of your visits where you write down all the information: name of the contact, address, email, date and time of the appointment.

Situation 2: a visit to a client whom you bill for your services.

In addition to the precautions I have indicated above, you can re-invoice him for the expenses you have incurred for the service provided. That will not affect the deduction of travel expenses.

Finally, from my own experience, I can tell you that the more proof you have that the vehicle is used exclusively for the activity, the more likely it is that the Tax Agency will not ask you to return the over-deducted VAT and/or personal income tax with its corresponding penalties.

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