The purpose and rationale of the tax treatment under the Value Added Tax Act and Council Directive 2006/112/EC on the common system of value added tax, and of the use and separation of goods for personal use or for purposes different from the independent business activity can be explained in the light of the characteristic features of the value added tax. First and foremost, it is a tax charged on final consumption and the proper functioning of its mechanism is ensured through the right to deduct it in the purchase of a product or service which is intended for the independent business operations of the relevant person. This principle is violated when the tax is deducted but the asset is used for personal needs.
In this connection, as from 1 January 2016, companies are required to state before the National Revenue Agency (NRA) whether the owners, managers and/or employees use corporate assets for personal needs. The tax treatment of the use and separation of goods for personal needs is different, depending on whether the goods are included in the assets/property of the company, whether the tax has already been deducted (wholly or in part) and whether the good has been provided for personal use temporarily or it has been definitively separated and removed from the corporate assets.
Where the goods and/or services are used entirely for personal needs, there is no taxation problem because the right to deduction is irrelevant in this case or the value added tax is charged on all related costs. Where the goods and/or services are used only for the independent business operations of the taxable person, there is no problem either because the right to deduct the whole amount of the tax will apply.
Businesses are confronted with challenges and practical difficulties in the cases in which a good and/or a service are used for both corporate and personal needs. The most difficult practical issue is to distinguish the corporate use from the personal use.
In accordance with Clarification No 200015 of 22 January 2016 of the National Revenue Agency on the tax treatment under the Value Added Tax Act of the use and separation of goods for the personal needs of the owner and the employees, where a taxable person intends to use a good which is included in his corporate assets also for personal needs, there are basically the following two legal alternatives:
- either to fully deduct the tax on the good and to charge the tax on the supply of the service relating to the use of the good for personal needs (i.e. to exercise the right to full deduction and to charge VAT on the personal use subsequently); or
- to exercise the right to deduction with regard to the good and the related costs on a pro rata basis, depending on the share of the use for business purposes and the share of the use for personal needs (i.e. to apply only partial deduction to the extent to which the good is used for business purposes).
Hence all VAT-registered companies have to charge and pay VAT for the free-of-charge personal use of goods and services by owners and employees, for which the tax has been deducted.
The Value Added Tax Act does not contain any provisions on the proportionate allocation of costs, depending on the extent to which the relevant good and/or service is used for personal needs. The NRA instructions point out that taxable persons are to devise their own cost allocation mechanism so that to establish the tax base, defining the relevant cost allocation base. The choice of the direct cost allocation base should conform to the nature of the relevant good. For example, if it is a vehicle (or all company vehicles), an appropriate basis for the allocation of the direct costs incurred could be the mileage covered or the duration of use measured in hours/days. With regard to real estate, an appropriate direct cost allocation base could be the acreage or the duration of use reported in hours/days or a combination of the two bases, e.g. a hotel room which used both for accommodation of client and for the owner’s personal needs. The taxable person should keep records to prove the way in which the mechanism has been applied to differentiate between costs for personal needs and costs for corporate needs.
To sum up, VAT-registered taxable persons have the following legal options relating to the VAT taxation of assets which are used for personal needs:
- If the right to deduction is not exercised on the good supplied, then no VAT is charged on the supply for personal needs;
- If the right to deduction is exercised on the good and the related costs, VAT is charged on the supply for personal needs;
- In the case of partial deduction, no VAT is charged on that portion on which the right to deduction has not been exercised.
The National Revenue Agency should focus on persons deducting the tax in the purchase of goods (cell phones, cell phone subscription, computers, equipment, vehicles, real estate) who actually use these assets for their personal needs or for purposes other than those of the independent business operations of the company.