Buying and operating a motor vehicle: your right to claim VAT deductions
In general, the value added tax included in the purchase price of goods or services can be deducted if the VAT-registered company made the purchases for a business purpose entitling the company to deductions in its value added taxation, and if the seller is a VAT-liable party.
However, in the case of the purchase price or operating costs of a motor vehicle, there are limitations to the company’s VAT deduction rights. The company’s right to claim deductions depends on the vehicles’ purposes of use and vehicle category, i.e. passenger car, van, etc.
Limited VAT deduction rights concern vehicles and vessels
In general, no deductions for the VAT included in purchase price are allowed for the following:
- Passenger cars
- Towed caravans for touring purposes
- Watercraft having a structure designed for sports and recreation
- Aircraft with maximum permissible take-off weight of no more than 1,550 kilograms
Furthermore, no deductions for the VAT included in the prices paid for goods and services connected to the above vehicles and vessels are allowed; this concerns their fuel, electric power charging, technical maintenance work and services, spare parts, materials and supplies.
Exceptions from the rules on limited VAT deductions for cars
Passenger cars are intended for the transport of persons and equipped with no more than eight seats in addition to the driver’s seat (vehicle category M1). Dual-purpose vehicles, motor caravans (campers), and light motor vehicles having a registration of a passenger car but intended primarily for the transport of goods (pickups) are also regarded as passenger cars.
The VAT-registered company can claim VAT deductions for purchase price and operating costs if its passenger car is only driven for purposes that entitle the company to VAT deductions. The company needs to present a driver’s log or similar proof in order to substantiate the declared purpose of use, which shows that the car is only driven when conducting business subjected to VAT, and this use of the car entitles the company to a VAT deduction.
In the case of a passenger car used in business, even a modest kilometre count of private driving, or use that does not entitle the company to deductions means that the whole of VAT is non-deductible. Examples of non-deductible uses include driving the car by an employee for trips between home and work, for other private purposes, and for business entertainment.
Example: Operating a car owned by a company
A passenger car bought by a real-property maintenance service is driven by the company’s employees as they move around, working on maintenance jobs. As long as the car is exclusively operated for work purposes, the company can claim full VAT deductions concerning both purchase price and operating costs. The company must provide a driver’s log in order to prove that the car is not used privately.
In the reverse case, if company employees were to operate the car for their private purposes which also includes driving from home to work and back, the company would lose its VAT deduction rights both for the car’s purchase price and its operating costs entirely.
Example: Car both in work use and given to an employee for company car
A company in the real estate business purchased several cars for its employees to drive; the real estate agents on company payroll not only use them in business but also drive them privately, which constitutes a fringe benefit for the employee doing so. Some of the cars have an internal combustion engine, others have a hybrid engine, and still others are fully electric. On normal workdays, the real estate agents sometimes buy fuel to fill the car’s tank or connect an electric car to a charging station. The company pays for the fuel and electricity.
Under the circumstances, the cars are in non-VAT-deductible use in addition to business use. Accordingly, the company cannot claim any deductions related to the VAT that was included in the cars’ purchase prices, or included in their operating costs, fuel costs, electric power costs, and vehicle-lease payments.
Example: Electric car driven exclusively in business is charged at the self-employed professional’s home
The electric car belonging to a self-employed’s business enterprise is only operated for purposes entitling the enterprise to VAT deductions. The self-employed person owns the house where the charging station is located, and has personally made a contract with the local electricity company on private basis. The house is not only a private residence but also the only office of the self-employed business enterprise.
There is a specific electricity meter measuring the charging station’s electricity. As for the house’s electricity bills, it is required that the self-employed person can reliably substantiate the amount of electricity used for charging the car. On this condition, the VAT relating to the charging of the car can be deducted.
Example: Employee or shareholder pays the charging costs for an electric car
A limited-liability company owns an electric car. Company employees or company shareholders charge it, paying for the electric power from their personal funds. The electric car’s only purpose of use is business, entitling the company to VAT deductions. The employees or shareholders who paid for charging customarily draw up an invoice, claiming their money back. Under these circumstances, no VAT deductions are allowed based on the employee’s or shareholder’s invoices to which original charger receipts, tickets, etc. are enclosed, although they contain value added tax.
Although private driving or non-VAT-deductible operation generally prevents all VAT deductions, this is not always the case. Car operation entitles the company to deduct the VAT related to the costs caused by business driving, if the purchase of the passenger car was made in order to:
- Re-sell it
- Rent it out
- Use it for professional passenger transport
- Use it for driving instruction
As with other cars, no VAT deductions related to private kilometres can be made even if the car purchase had been made for a purpose listed above. However, in this case, the limitation of VAT deduction rights does not extend to the whole of the VAT. For example, the cars owned by a taxi company or by a driving school continue to entitle the company to deductions for the kilometres driven in business.
Example: Taxi company’s taxicab is used for both passenger transport and private driving
A taxi company has a car that is used for professional passenger transport and also for private purposes. The taxi company can claim VAT deductions, for both purchase price and operating costs, to the extent the car is driven for business purposes, i.e. for professional passenger transport. The company is not allowed to deduct the VAT of the expenses caused by the private driving. The company must be able to produce a driver’s log or other comparable evidence to prove to what extent the car serves the taxi business, i.e. professional passenger transport, and to what extent it is operated privately.
Example: Rent-a-car company’s car is sometimes rented out, sometimes driven for private purposes
A car rental business owns a passenger car for rental purposes. However, the car is also a fringe benefit company car that company employees can use. The company can claim VAT deductions, both for purchase price and operating costs, in accordance with the extent the car is used for business purposes, i.e. rented out as a rental vehicle. The company is not allowed to deduct the VAT related to the times when the car serves as an employee’s company car. The company must be able to produce a driver’s log or other comparable evidence to prove to what extent the car serves the rental business and to what extent it is used privately.
In the same way, in situations where a motor dealer company buys cars not only for its stock-in-trade but also to be operated as company cars by employees, the motor dealer is not allowed to deduct the VAT of the costs caused by the employee’s driving, not for the cars’ purchase prices nor for their operating costs.
However, if car operation partially consists of professional passenger transport, for example, and the rest of the operation serves a purpose connected to other company business activities that entitle the company to VAT deductions, the company is allowed to deduct the VAT related to purchase price and operating costs in full. For such a company, the purchase is deemed to have been made exclusively for a business purpose that entitles the company to VAT deductions.
However, if the car is also operated for private driving or for other purposes that are non-VAT-deductible, the company can only claim VAT deductions to the extent the car is used for professional passenger transport. This means that in the above circumstances, VAT deductions are denied both for private driving and for the other company business, because the car would no longer exclusively serve a business purpose that entitles the company to VAT deductions. The company must be able to produce a driver’s log or other comparable evidence to prove to what extent the car is used for business purposes entitling the company to VAT deductions.
Example: Taxicab is only operated for purposes entitling the company to VAT deductions
A taxi company has a passenger car operated both for professional passenger transport and for home deliveries of meals or pharmaceuticals. The company can claim full VAT deductions concerning both purchase price and operating costs. The company can keep a driver’s log in order to prove that the car is not used privately.
Example: Taxicab is not only operated for passenger and goods transport but also driven for private purposes
A taxi company has a passenger car operated both for professional passenger transport and for goods transport such as deliveries of meals. Additionally, company employees drive the car for their trips from home to office and back, i.e. for non-VAT-deductible trips. The taxi company can claim VAT deductions, both for purchase price and for operating costs, only to the extent the car is used for professional passenger transport. The company needs to produce a driver’s logbook or other comparable evidence to prove to what extent the car serves the business of professional passenger transport.
Motorcycles, towed caravans, crafts and vessels: not all business activities entitle the owner to VAT deductions
Motorcycles, towed caravans, or a watercraft and aircraft, with maximum take-off weight of no more than 1550 kilograms, having a structure primarily intended for sports and recreation: VAT can be deducted only if the company had bought the vehicle or craft in order to
- Re-sell it
- Rent it out
- Use it for professional passenger transport
- Use it for driving instruction
Only the part of the VAT that has a connection to the above purposes of use can be deducted. The part related to private use is not deductible.
Example: Towed caravan doubles as a coffee shop at the local marketplace
A self-employed person having a VAT registration has parked a caravan at the local marketplace to run a coffee shop. The caravan’s vehicle registration designates it as a towed vehicle for touring. The self-employed person is not allowed to deduct the VAT related to the caravan’s purchase price or operating costs, because the caravan was not bought for a purpose such as to be re-sold, rented out, operated for professional passenger transport or for driving instruction.
Vans, lorries or trucks, buses and other motor vehicles: the part of the VAT is deductible, which relates to the company’s business entitling the company to VAT deductions
Vans are vehicles designed for transporting goods. Its maximum weight is 3.5 tonnes in total (vehicle category N1). Read more about vehicle categories (traficom.fi)
For vans, lorries or trucks, and buses, the part of the VAT is deductible, both for the purchase price and operating costs, that relates to vehicle operation entitling the company to VAT deductions. The part related to private use or to business entertainment is not deductible. In the same way, the part related to a business activity exempted from VAT is not deductible. Read more: What business operations are exempted from VAT?
For example, if a business enterprise has a van, operated exclusively in business, which entitles the company to VAT deductions, the enterprise can claim VAT deductions in full. If instead, the enterprise also operates the van for non-VAT-deductible purposes including private driving or business entertainment, the costs related to this are not deductible. The company can make records in a driver’s logbook or provide other comparable evidence to specify the instances when the vehicle serves the business entitling the company to VAT deductions, and to break down the kilometres of private and other driving being non-VAT-deductible.
Example: Van in work and private use
A cleaning company has bought a van, for which the vehicle registration category is “van”, as well. The van is in business use, but the employees may also use it privately. Part of the cleaning company’s business consists of provision of social services, an activity exempted from VAT. The appropriate part of the van’s purchase price and operating costs that reflect the vehicle’s business kilometres can be deducted. The parts related to the activity exempted from VAT, and to private use, are not deductible. The cleaning company needs to produce a driver’s log or other evidence of the extent the van is operated for non-VAT-deductible purposes.
In the same way as for other motorised vehicles, VAT deductions can be claimed for the part of the costs related to purposes that entitle the relevant business enterprise to VAT deductions in the case of mopeds, light quadricycles, scooters having a registration comparable to mopeds, snowmobiles, bicycles and hydrocopters, which also includes the costs paid for goods and services connected to their operation. The part related to private or other non-VAT-deductible use is not deductible. The company needs to produce a driver’s log or other comparable evidence to indicate that its vehicle is operated for a purpose that entitles the company to VAT deductions.
Required information for recording in the log
Driver’s log entries must be made for every vehicle on a specific basis. The following information is required for each day of vehicle operation:
- Start and end date and times of each trip
- Starting point and destination of each trip
- The route, if relevant
- Odometer readings at the start and end
- The kilometres driven
- Purpose of the trip
- Name of the driver of the vehicle
If the motor vehicle in question is not equipped with an odometer, we recommend installing one, as the company needs to be able to substantiate the kilometres driven.
If prevailing circumstances make it impossible to measure the extent of vehicle operation in kilometres, it is permissible to measure it in terms of operating hours.
Driver’s logbooks must be stored with the company’s other accounting materials. Accordingly, they need to be stored for at least 6 years.
How to claim the deductible value added taxes?
If VAT is deductible, fill it in under “Tax deductible for the tax period” when completing your VAT return form. Read more about submitting and making corrections to the VAT return