Fleet News

Tax on cars in Ireland

BRIAN Butler, director, VAT Services, and Frank Mitchell, barrister-at-law, VAT Services, at PricewaterhouseCoopers' Dublin office, analyse tax issues surrounding company cars in Ireland.

More than five years have passed since the phrase 'Celtic Tiger' was coined to describe Ireland's rapidly expanding economy. Fuelled by substantial inward investment, attracted by a pro-business tax regime and a highly educated young workforce, the economy ignited. As the tiger seeks to find a firmer footing in the international commercial world, attention has been focused on our own infrastructure deficits.

Traffic in Dublin and other cities around the country is at crisis point. The capital risks being crippled by its own success. In response to intense media pressure and public dissatisfaction, the Government established a Cabinet Committee on Infrastructural Development, including Private Public Partnership to address the issues. Several stopgap measures such as widespread clamping and the introduction of quality bus corridors have made little impact on the problems in the capital. Focused investment is now essential.

The National Development Plan 2000–06 concentrates heavily on the need to upgrade the national roads and has allocated over 5.6 billion Euros for this purpose. Improvement however, is painfully slow.

One might be forgiven for thinking that the inadequacy of our roads might in some way be linked to a proliferation of cheap cars. Conversely however, Ireland is one of the most expensive countries in Europe in which to buy a car, and car ownership levels are among the lowest in the European Union.

Even though pre-tax prices in Ireland are in line with the EU average, the addition of up to 73% in taxes makes new cars in Ireland among the most expensive in the European Union. Irish cars are overtaxed and there is virtually no saving involved through importation; but is this taxation policy justifiable?

In 1999 the Irish Government netted approximately 3,243 Euros million from the motor industry and this figure looks set to rise sharply this year. However the Government's fiscal policy over the past number of years has been to lower taxes across the board. Income Tax, Corporation Tax, Capital Gains Tax and Capital Acquisitions Tax have all seen notable reductions in the past five years. Why then are motor related taxes being maintained at such an inflated level?

The obvious rationale behind a fiscal policy of this sort is to lower the number of vehicles on the road so as to reduce congestion and minimise pollution. However, the number of new cars registered this year already exceeds the total of 174,229 for 1999. So it would seem that the Irish public in this buoyant economy is not deterred by the excessive prices being charged for new cars.

It must be remembered that Ireland has one of the lowest levels of car ownership in the EU. There are only 31 cars in Ireland per 100 people compared with the EU average of 45.

The difficulty is not with the number of cars on the road but with the number and quality of roads for the cars.

There is therefore little option for the Government other than to ensure the rapid upgrade of the country's infrastructure, which will help to curb congestion and consequently decrease pollution.

In 1999 only 10% of all motoring taxes was spent on roads. It is hoped that in line with the objectives laid out in the National Development Plan 2000–06 the level of expenditure will increase rapidly.

Motor expenses
Where a car is used for business purposes but the cost of the vehicle exceeds €20,950, the expenses and wear and tear for which the company or business can take a deduction are restricted. The policy behind this is to discourage the provision of 'luxury' cars to employees. However, there is not a single Audi, BMW or Mercedes-Benz available for less than the threshold and would leave one wondering about the Government's definition of a luxury car.

What this provision means in effect is that if you have a car provided by an employer and the cost (as opposed to open market value) of the vehicle exceeds the threshold above, the employer's allowable expenses and wear and tear will be restricted accordingly.

To illustrate, if the car provided for business purposes costs €25,000 and the total business expenses relating to running that car (fuel, insurance, etc.) are 3,000 Euros, these will be restricted in the adjusted profit computation of the business or company.
The employer/business/company will be entitled to a deduction in its tax computation of only 2,514 Euros instead of 3,000 Euros.

The amount on which the business will be entitled to claim a wear and tear allowance is also restricted. Ordinarily a business can claim 15% of the cost of the car each year for six years and 10% in the seventh year. However where the value of the car exceeds 20,950 Euros the allowance may only be calculated as a percentage of this threshold figure regardless of the actual cost of the car.

Indirect tax
Vehicle Registration Tax (VRT): VRT was introduced on January 1, 1993 on the abolition of excise duty. It is to all intents and purposes Excise Duty by a different name.

Readers may recall from the overview of German motor tax in the July issue of Fleet News Europe that vehicle registration in Germany would not typically exceed 100 Euros.
In Ireland the taxation rates are calculated as a percentage of the open market selling price of the car, including all taxes payable in the state.

Vehicles up to 1,400cc are charged at 22.5% of the open market selling price, 1,401cc–2,000cc are charged at 25% and those with an engine capacity in excess of 2.0 litres are charged at 30%. Due to the peculiar method of calculation, these percentages are more in the order of 35%, 40% and 52% respectively.

For illustrative purposes take a 2,000cc car with a pre-tax price of 25,000 Euros. The VAT will be 21% of this figure ie 5,250 Euros. VRT is defined as 30% of the open market selling price of the car or, the price of the car after VAT and VRT! The VRT is not 30% in any real sense, but is in effect 52% of the pre-tax value or, in this example 12,964 Euros.

This huge element of double taxation involved results in a tax that is, in the authors' opinion, misleading in its description and objectionable in its effect. The cost to the consumer of this car is then 43,214 Euros. Put another way the tax element of the price is equivalent to 73% of the pre-tax value of the car.

Motor Tax: Motor tax on private cars ranges from 125 Euros for cars with an engine capacity below 1,000cc, to 1,377 Euros for vehicles with greater than 3,001cc engines.
Within these limits the rate of tax varies with every 100cc increase in engine capacity. A special rate of 159 Euros applies to electric-powered cars.

VAT at the rate of 21% is incurred on the purchase of motor vehicles and is irrecoverable apart from a few exceptions.

To compound the problem the Irish Revenue introduced blocking measures to prohibit VAT recovery to foreign lessors despite being specifically allowed under EU VAT law. Representations have been made from time to time by industry to allow for VAT recovery, but to date no action has been taken.

The exceptional circumstances in which VAT recovery is permitted relate to the purchase, hiring, inter-community acquisition, or importation as stock-in-trade or for the purposes of a business which consists in whole or part of the hiring of cars, or for use in a driving school business, for giving driving instruction.

Importing cars
It is common knowledge among Irish consumers that cars are cheaper in mainland Europe, but is it possible to take advantage of this price differential? Drivers can of course purchase the car in another EU member state and may bring it back to Ireland without any difficulty, but will pay a price.

All cars that are imported from another Member State (referred to as an 'intra-community acquisition') are subject to Irish VAT at 21% unless they are over six months old and have more than 6,000km on the clock.

All cars imported from outside the EU are subject to VAT at 21% regardless of age or mileage. All cars imported both from the EU and outside the EU are subject to the same VRT rates as Irish cars. Vehicles imported from outside the EU are subject to an additional 10% customs duty. Therefore there is no real benefit unless the pre-tax cost of the car is significantly lower in the foreign state, and statistics show that this is not generally the case.

Cross-border Leasing: Under Irish VAT law, a lessee cannot recover Irish VAT incurred on the leasing of cars even where they are used fully for the purpose of a VATable business, eg a sales representative's car leased by a drinks distributor. However it should be possible, in view of the judgement in the Aro Leasing case heard before the European Court of Justice, to avoid a VAT cost by leasing cars from a lessor established in another member state.

If an Irish registered entity leases cars from a German lessor, German VAT would be chargeable on the lease rentals but this would be recoverable by the Irish lessee. Irish VAT would be incurred by the German lessor on the purchase of the cars and this should be recoverable. However the Irish Revenue introduced a blocking measure prohibiting VAT recovery by the lessor on the purchase of the cars in Ireland. This cost would through commercial necessity then be passed on to the lessee, which erodes any tax advantage that would otherwise exist.

In our view this blocking measure is clearly in breach of EU VAT law but to date it has not been challenged.

BIK is charged where a company provides a car for use by an employee.
Where BIK is applicable it is calculated on 30% of the open market value of the car, which can be reduced to 18.5% if all insurance, repairs, servicing, tax, and private fuel costs are borne by the employee.

The total BIK can be reduced further by a percentage ranging between 2.5% and 75% where in excess of 15,000 miles per annum relate to business mileage. For example if an employee receives a company car with an open market value of €15,000 and the employer bears all costs in relation to that vehicle, the employee will pay income tax on 4,500 Euros.

Tax is payable at the employee's marginal rate which is either 22% or 44%. If, however, the employee were to bear all costs in relation to the vehicle he would be liable to income tax on BIK of 2,775 Euros.

If he/she were to cover more than 30,000 business miles per annum this sum would be reduced to 694 Euros (based on the maximum reduction of 75%).

As an alternative to the business mileage-based reduction the BIK charge may be reduced by 20% where certain other conditions are fulfilled.
These include spending 70% of working time away from the office, working at least a 20-hour week, travelling at least 5,000 business miles per annum and keeping a log book of the mileage covered.

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