When a motor vehicle is available for the use of an employee, manager, or shareholder beyond working hours, it is considered as partially used for private purposes.
This article delves into the intricate domain of motor vehicle expenditures utilized for both, business and personal purposes, considering the implications of both corporate tax and value-added tax.
Abbreviations
FTA – Federal Tax Authority
CT – Corporate Tax
CTL – Corporate Tax Law – Federal Decree Law n. 47 of 2022
VAT – Value Added Tax
VATL – Value Added Tax Law – Federal Decree Law n. 8 of 2017
VATER - Value Added Tax Executive Regulations – Cabinet Decision n. 52 of 2017
Assumptions
Within the context of this article, the term "motor vehicles" pertains to the definition of motor vehicles outlined in the Art. 23 VATER, being road vehicles designed or adapted for the conveyance of no more than 10 peoples including the driver.
While considering deduction of motor vehicles expenses for CT computation and recovery of related Input VAT we assume that the taxable person is neither providing Exempt Supplies as per VATL nor deriving Exempt Income as per CTL.
General Principles
In the context of CT in the UAE, the general rule[1] dictates that business expenses incurred wholly and exclusively for the purposes of the taxable person’s business are deductible.
If expenses are incurred for both business and non-business purposes deduction is allowed for:
- any identifiable part or proportion of the expenditure incurred wholly and exclusively for business purposes
- An appropriate proportion of any unidentifiable part or proportion of the expenditure determined on fair and reasonable basis, having regard to the relevant facts and circumstances of the business.
Similarly, VATL[2] stipulates that Input VAT is recoverable for goods and services which are used or intended to be used for making taxable supplies and supplies that are made outside UAE which would have been taxable supply had they been made in UAE.
At current date there is no specific cabinet decision or public clarification providing specific guidance on dual use Motor Vehicle expenses, hence taxable person has to apply the above general principles to practical cases.
Fines and penalties, including traffic fines associated with the operation of motor vehicles, are expressly disallowed as deductible expenses[3],
Applying Theory To Practice
Let’s go through some practical examples in which your company may be involved.
Case 1
The company possesses a vehicle which is assigned to an employee to carry out his work duties and remain accessible for personal use by the employee beyond regular working hours.
The practical question is how can one ascertain an identifiable part or proportion of expenses that are wholly and exclusively incurred for business purposes. The most practical solution that comes to mind is to maintain a meticulous mileage record documenting the starting and ending mileage for each business trip (eg. date, starting mileage, ending mileage, purpose of trip, purpose of meeting etc.) and calculating the proportion over the total mileage of the vehicle. The more detailed is the record the better it will be to face any challenge from FTA.
When it is not possible to identify a part or proportion wholly and exclusively incurred for business purposes letter b clause 3 of Aert. 28 CTL provide the option to determine an appropriate proportion of any unidentifiable part or proportion on fair and reasonable basis.
This option introduces us to a more tortuous terrain, as it involves determining what is considered "appropriate," "fair," and "reasonable." These terms are inherently subjective and open to different interpretation.
Let’s assume the scenario of a company specialized in AC system maintenance who assigns the vehicle to an employee whose only task is to accessing client premises and performing on-site maintenance services. Here, since during working hours the vehicle is continuously used for business purposes, a practical and prudential application of letter b) could involve a calculation based on working hours over total hours.
Total hours per year: 24x365= 8,760
Total working hours assuming 251 working days: 8x251 = 2,008
Appropriate proportion of deductible expenditures: 8,760/2,008=22.9%
Case 2
The employee occasionally utilizes his private vehicle to carry out work duties and submit a reimbursement claim to the company.
In contrast to certain other jurisdictions, UAE tax authorities have not, as of yet, established standardized mileage rates for the calculation of deductible expenses per mile.
In principle, all expenses related to the utilization of a private vehicle for business purposes are eligible for deduction. This encompasses items such as consumed petrol, toll fees (Salik), a proportion of registration expenses, insurance costs, depreciation etc.
It is imperative that all such expenditures are meticulously documented by the employee and the computation of the deductible amount adheres to the same principles elucidated in case 1.
Case 3
The company purchase a luxury car which is assigned to the manager/director of the company.
Here, in addition to the dissertations referred to in case 1 the additional question is whether or not the business activity is getting any advantage from the use of such expensive car.
Someone may argue that having a manager showing up at business meetings with a shining Ferrari could lead the positive message of proficiency and profitability of the company.
While there may not be a definitive answer, and so far, no official guidance from FTA, it is recommended to maintain a conservative approach avoiding to utilize luxury cars for both personal and business purposes, unless strictly required by the context of the business.
Pragmatic approach and risk assessment
It is evident that calculating the deductible portion of expenditures related vehicle used for both business and private purposes, pose administrative challenges, particularly when relying on the criteria outlined in clause 3 letter b) of Article 28 CTL. This provision hinges on subjective concepts such as "appropriate," "fair," and "reasonable," introducing a realm of discretion that could be subject to scrutiny by the FTA.
Assessing the actual amount of CT involved and the consequences in case of disallowance of deduction of vehicle expenditures will help to set practical procedures.
Consider, for instance, a small family-owned business operating a single vehicle. Upon careful assessment, it may be determined that the total annual expenditure of a dual-use vehicle amounts to 30,000 AED. Assuming a 60% deductible portion, this results in a CT saving of 1,620 AED. In such circumstances, the business proprietor might opt against deducting dual-use vehicle expenditures, thereby saving time and reducing the administrative burden associated with maintaining detailed mileage records.
Conversely, for a company managing a fleet of several vehicles, it would be advisable to adopt specialized software for tracking mileage and location through GPS.
It is noteworthy that if incorrect CT return has been submitted in good faith with no deliberate intention to evade tax and a tax assessment is subsequently issued by the FTA revealing a tax discrepancy not exceeding AED 10,000, the taxpayer is allowed to rectify the mistake and pay the tax difference without incurring significant fines through the procedure of the voluntary disclosure[4]
CT and VAT
Tax treatment of expenses pertaining motor vehicles for CT and VAT purposes are strictly related. As a matter of fact, if the expenditure in not deductible for CT purposes, VAT paid on such expenditure (if any) shall not be recoverable as Input VAT while submitting the relevant periodic VAT return.
For such expenses where deduction is based on a proportion the same ratio should apply in order to determine the recoverable Input VAT.
Conclusions
Deduction of motor vehicles expenditures partially utilized for private purposes has to be carefully documented. As of today, no specific guidance has been provided by FTA in order to streamline the computation of identifiable part or proportion, or appropriate proportion of any unidentifiable part or proportion, of the motor vehicle expenditure incurred for business purposes.
Under such circumstances, it is advisable to adopt a pragmatic approach, assessing the trade-off between the tax savings achieved through the deduction of business-related motor vehicle expenses and the administrative burdens associated with maintaining adequate supporting documentation.
Footnotes:
[1] Art. 28 CTL
[2] Art. 54 VATL
[3] Art. 33 CTL
[4] The matter is regulated by the combined provisions of Federal Decree-Law No. 28 of 2022 on Tax Procedures; Cabinet Decision n. 74 of 2023 on executive regulation of Tax Procedures, and Cabinet Decision 75 of 2023 on administrative penalties related to CT.
