Sale of a car that is a fixed asset
Most often, the sale of a company car will mean getting rid of one of the company’s fixed assets. This applies when the vehicle was used only in the course of business (and not for private purposes). Over the life of the vehicle, it’s a good deal – it allows you to take depreciation deductions, as well as include the cost of fuel, service, repairs and replacement parts as a deductible expense. In this way, entrepreneurs reduce the income tax to be paid over the lifetime of the car.
The dark side of such an arrangement manifests itself when the company intends to sell the vehicle, in which case revenue must be reported. In this case, treat the net value of the transaction as one of the other revenues in the Income and Expense Ledger and put it in column No. 8, and then pay income tax on it. Not surprisingly, many entrepreneurs are asking themselves…
How to avoid income tax caused by the sale of a company car?
The vast majority of corporate transactions involve tax on them, and the sale of a car is no exception. There are only two ways to avoid coupling the transaction with the creation of revenue for the company. Unfortunately for entrepreneurs, the effectiveness of the most popular of these methods was significantly reduced in January 2022.
Withdrawal of a vehicle from company assets
We are talking about taking a vehicle out of company property and transferring it to private use. To do this, all you need to do is draw up a statement – from now on, the vehicle becomes the private property of the business person, not an asset of the company. However, the legislature anticipated such a move on the part of entrepreneurs wishing to pay less taxes, and extended the previously applicable six-month grace period to six years.
This means that only six years after the car is withdrawn from business assets, its sale will not result in business income.
Important!
The 6-year period begins to expire from the first month following the month in which the car was taken out of business.
Example:
Mr. Christopher withdrew the car from company property on April 7, 2018. The 6-year period accrues from May 1, 2018, which means that Mr. Christopher will only be able to sell the car without generating revenue for his company on May 1, 2024.
This change in the law virtually rules out the possibility of “planning” the sale of a car without paying PIT. It’s hard to imagine a situation in which an entrepreneur gives up the use of a vehicle for business purposes for six years just to avoid tax – especially given how the passage of time generally affects the market value of vehicles.
Car as a donation
There is another way – a company car can be withdrawn from company assets as a donation. In this situation, the person who receives the vehicle can sell it. This will not generate income on the part of the company that previously owned the car. What’s more, even a vehicle can be donated in this way without first withdrawing it from the estate (making a statement).
An obvious but necessary condition for this method to work is that the entrepreneur actually makes a gratuitous donation. Only in this case, no income will arise (after all, the entrepreneur will not earn any money from this transfer) and there will be no basis for charging tax.
Sale of a company vehicle and VAT
If you are an active VAT taxpayer, you must pay VAT on the sale of a company car (which is a fixed asset of the company) at the standard rate – 23%. The important thing is that the degree of VAT deduction on the purchase of the vehicle does not matter. Both for full and partial VAT deduction, and even when the company was not entitled to deduct VAT at all, the same tax rate should be applied to the sale.
It is possible to take advantage of the VAT exemption when selling a company vehicle, but this requires two conditions. First: the businessman had no right to deduct input tax on the purchase of the vehicle. Second: the car was only used for VAT-exempt activities throughout its life.
Example:
Mr. Krzysztof purchased a car for business purposes in 2013 from an acquaintance – an individual – and therefore could not exercise his right to deduct input tax. However, if he purchased fuel and made repairs while using the vehicle, including the related expenses as a deductible expense, he cannot take advantage of the tax exemption. This means that he will have to pay VAT at the standard rate of 23% when selling the vehicle.
VAT adjustment in case of change of use of car
The entrepreneur should make an adjustment to the input VAT when there is a change in the vehicle’s destination. We are talking about one of three situations:
- when the car ceases to be used only for business, and begins to be used for private purposes as well,
- When the car from being used for business and private life is intended to carry out only corporate purposes,
- When a businessman sells a vehicle before the VAT adjustment period expires.
What is the VAT adjustment period?
This is a period of 60 or 12 months, calculated from the date of purchase or import of the vehicle. If there is a change of use of the vehicle during the VAT adjustment period, an adjustment must be made accordingly.
- The 60-month period applies to vehicles with a value of PLN 15,000 or more – we are talking about the value at the time of purchase,
- The 12-month VAT adjustment period applies to vehicles with a value of up to PLN 15,000.
After the adjustment period, a change in the vehicle’s destination (including a sale) will not result in an adjustment of the input VAT.
Example:
Mr. Christopher purchased the car for the company in 2021. He intends to sell the vehicle at the beginning of 2024. As a result, he will have to make a VAT adjustment. If he previously used the vehicle only for business purposes and enjoyed a 100% VAT deduction, the adjustment is unlikely to benefit him at the time of sale. However, if he only deducted 50% of the VAT, it may be that Mr. Christopher will recover some of the VAT at the time of sale.
Summary
The sale of a company car has both PIT and VAT consequences. So before you decide to sell your vehicle, make sure that tax issues won’t eat up a significant portion of the cost. Remember, too, that the timing of the transaction can make a big difference.
In the context of income tax, it makes no sense to plan the sale of a car in advance – the need to wait out the six-year grace period, the passage of which allows the sale without income tax, practically rules out this scenario. In six years a lot of things can happen to a car that will negatively affect its value even more than the passing of time.
