Taxation of Private Vehicle Use: The 1% Rule and VAT

For the self-employed, this taxation is more complex than for employees: in addition to income tax, VAT is also due. Since 2003, business owners have been permitted to deduct input tax on vehicle purchases in full; in return, they pay 19% VAT on the benefit in kind.

But how are the tax bases calculated for income tax and VAT under the popular 1% rule? We explain it all!

If, as a freelancer or trader, you are required to pay tax on the private-use portion of your company car, you have two options:

• flat-rate 1% rule
• mileage log

Both options allow you to determine the basis of assessment for income tax and VAT. In practice, most self-employed individuals opt for the flat-rate method, as it is simpler and financially advantageous.

Under this flat-rate method, the gross list price forms the basis. This is the manufacturer's recommended retail price (RRP) applicable in Germany on the date of first registration.

The tax office treats 1% of this amount as a taxable benefit in kind each month.

If the manufacturer's gross list price for your business vehicle on the date of first registration is 50,000 euros, the benefit in kind under the 1% rule amounts to 500 euros per month. This sum increases the assessment basis for your income tax.

For VAT purposes, a different calculation method applies — the 80/20 rule. You are permitted to deduct a flat 20% from the gross list price, as not all cost components of vehicle expenses include input tax amounts.

This flat-rate deduction simplifies the process. In the example mentioned above, this means specifically:

500 euros per month less 20% = 400 euros

19% VAT on 400 euros = 76 euros

You pay 76 euros in VAT per month. The amount of income tax, by contrast, depends on your individual tax rate.

The legislature encourages the purchase of environmentally friendly company vehicles: if you purchase an electric vehicle, for example, your income tax liability is considerably reduced. The calculation method under the 1% rule is identical — however, the state allows you to apply a lower gross list price.

For an electric company car, the assessment basis is reduced to one quarter of the list price — in our example, it falls from 50,000 euros to 12,500 euros. The monthly amount under the 1% rule decreases from 500 euros to 125 euros. The VAT is unaffected; you continue to pay 76 euros per month.

Are you self-employed and using your company car for private journeys? In most cases, there are good reasons to opt for the 1% rule and VAT treatment. In individual circumstances, other solutions such as a mileage log or cost capping may be more favourable. Contact your Guhr Steuerberatung in Berlin for a thorough analysis!

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