Maximising tax benefits: The choice between a company car and a private car

In this article, we examine the tax implications of using a car for private and business purposes, covering scenarios of using a company car for private purposes and a private car for business purposes. We discuss calculating private share, social security contributions, and VAT for a company car. We also highlight the importance of recording mileage, possible cost savings, and restrictions when using a private car for business purposes.

Private car for business purposes versus a company car: what is the difference?

The use of company cars is becoming increasingly popular in the professional working environment. A company car can be an attractive benefit for employees, as it allows them to use a vehicle without having to bear the cost of ownership and maintenance. Therefore, companies with physical offices may offer their employees the use of a company vehicle as an added incentive, helping to attract and retain the best employees.

But what exactly is the difference between a private car and a company car?

The answer to this question is quite simple really: a private car is a vehicle that is owned by an individual employee in their personal capacity, while a company car is a vehicle that is owned by a company and is provided to employees primarily for business use.

Is it always more beneficial for employees to use a company car?

While a company car clearly has its benefits for employees, answering this next question is not quite as straightforward as it may appear. Whether an employee uses a company-owned vehicle or their own private vehicle, in both situations the car would most likely be used for both business and personal purposes. It therefore becomes necessary to adequately account for this “dual usage” of the car. If an employee uses a company car, they need to be able to account for the private usage of that car (known as the “private share”). Similarly, if they only use a private car, they should calculate what proportion of that usage is for business purposes for reimbursement and tax deductions.

The relative tax and compensation implications of using a private or company car will depend on several factors such as the distribution of usage between private and business use, the value of the car, distance traveled, and other key issues. We will now break down these factors in more detail.  To do so, we need to consider two distinct scenarios and show how they can affect the overall tax burden of the employee as well as the costs they incur for transportation. These are:

• Using a company vehicle for private purposes
• Using a private vehicle for business purposes

Private use of a company-owned vehicle

An employer may provide a company car to their employees, which is primarily for business use. However, if an employee or owner uses a company-owned car for private purposes without paying compensation for this, it is considered a non-cash benefit. It must therefore be reported as a component of salary and the employee must pay tax and social security contributions on it.

The following points are relevant for the private use of a company-owned vehicle:

• Maintenance costs and purchase price are tax-deductible expenses.
• Input tax deduction for the purchase price, maintenance, and fuel.
• 10.8% of the purchase price must be shown as a salary component.
• VAT must be declared on this 10.8% of the purchase price.
• Deduction of commuting expenses is no longer possible.

In accounting terms, this “private share” of the company car is deducted from vehicle expenses and offset against the employee as a taxable income. There are two methods for calculating the private share of the vehicle: the flat rate method and the effective method:

Flat-rate method to calculate the private share of a company vehicle:

The most common method used to calculate the private share of a company vehicle is the flat-rate method. This method assumes that the employee uses the company car for private use for a certain percentage of the time, and this percentage is multiplied by the purchase price of the car to determine the taxable benefit.

In Switzerland, this flat rate has been set at 0.9% of the purchase price of the car (excluding VAT) per month as of 1. January 2022 (increased from 0.8% prior to that), which equates to 10.8% per year. However, there is a minimum flat rate of at least CHF 150 per month (CHF 1,800 per year)

Example:

Audi A4 purchase price: CHF 43,000 (excluding VAT)

Private share per month = 43,000 * 0.9% = CHF 387

Volkswagen Polo purchase price: CHF 14,000 (excluding VAT)

Private share per month 14’000 * 0.9%= CHF 126 -> CHF 150/month

In addition, field F (“Free transport between home and place of work”) must be ticked on the salary statement. This means the costs of commuting to work can no longer be deducted from the private tax return, as the employer is effectively covering the costs by providing the employee with a company vehicle.

When should the flat rate method not be used?

If you are an employee who seldomly uses a company car for private purposes, the flat rate method should not be your first choice to calculate your private share. The fixed assumption of the private share may significantly overestimate your private usage, in which case you could end up with a much lower calculation of the private share if you use an alternative method of calculation, such as the effective method. This will then lead to a smaller non-cash benefit to report on your salary and therefore reduced tax liability.

The same applies if you drive a vehicle with a higher purchase price, as the per km rate in the effective method remains constant irrespective of the value of the vehicle, whereas it increases the private share in the case of the flat-rate method.

The effective method of calculating the private share- using a logbook:

Bei der effektiven Methode wird der Privatanteil durch das Führen eines Fahrtenbuchs berechnet, in dem die privat und geschäftlich gefahrenen Kilometer (inkl. Arbeitsweg) getrennt aufgezeichnet werden. Der Privatanteil errechnet sich aus der Multiplikation der privat gefahrenen Kilometer mit dem Einheitskilometersatz von CHF 0.70.

Example:

Let’s take the same Audi A4 with a purchase price of CHF 43,000. The employee who drives it kept a logbook, according to which they drove 5000km for private purposes during the course of the year. The kilometer rate is CHF 0.70/km, therefore:

Private share = 5000 * 0.70 = CHF 3,500

If the same employee had instead used the flat-rate method to calculate the private share, it would have come to CHF 4,644 for the year. In this case, we can see that the use of the effective (logbook) method is more advantageous for the employee in question.

Value-added tax on the private share

In addition to reporting the private share as a salary benefit and paying social security contributions on it, the employer must also declare the private share as remuneration for VAT purposes. With the effective and balance tax rate method, the private share is therefore considered taxable turnover (Art. 47 para. 2 MWSTV). Accordingly, the declaration must be made in item 200 and item 302, or in item 200 and item 322 or 332.

Example:

We will consider the same example as the flat-rate calculations earlier.

Audi A4 private share (as above) = CHF 387.

VAT due on private share = CHF 387 * 7.7% = CHF 29.80 per month

Volkswagen Polo private share (as above) = CHF 150

VAT owed on private share = CHF 150 * 7.7% = CHF 11.55 per month

What about daily commute expenses between home and the workplace?

Ordinarily, the employee should bear the costs of daily commute to their workplace. This means that if you use a company vehicle to drive to work but do not compensate the employer at least CHF 0.70 per kilometer, you are effectively receiving a “benefit in kind” of the equivalent travel costs.

However, when it comes to calculating the private share of the vehicle, the distance travelled for commuting to work is not taken into account because it is not defined as private use per se. This means that your employer can assume these costs if it is agreed that you do not need to compensate them. In this case, the employer should indicate it on your salary statement by ticking the box F, “Free transport between home and place of work.” In terms of accounting for this in the books of the business, the employer can post the expense as a form of employee compensation (i.e., non-monetary salary benefit).

How is this ‘commute benefit’ reflected in the employee’s private tax return?

Firstly, as your employer pays for your commuting costs to work, these costs can no longer be deducted from the private tax return as professional expenses. Previously, if the value of the free transport (calculated at CHF 0.70/km) exceeded the maximum commuter deductions set at the federal and cantonal levels, the excess was deemed to add to the calculation of the private share and would also be taxed as income. However, since the increase in the flat rate percentage for the calculation of the private share (from 0.8% to 0.9%), this additional mileage is already taken into account and so further wage offsetting is no longer required.

Is a sole trader’s vehicle considered to be a private or company car?

A sole proprietor or self-employed person’s car is categorized as either a private vehicle or company vehicle depending on how they use it most. If a sole trader drives more than 50% of their kilometers for business, the car is considered to be a ‘company vehicle’ and is therefore recorded as a business asset of their sole proprietorship. Naturally, it is considered a private vehicle if more than 50% of the kilometers driven are for private use.

It follows that if it is deemed a company vehicle, the private share must be calculated and accounted for as previously discussed. If it is deemed a private vehicle, adequate compensation and deduction of the travel expenses for business purposes should be accounted for.

Special case of private share of a luxury car

The legislator may decide to not provide tax allowances for extravagant items such as luxury vehicles. If the tax authorities of a region determine that a vehicle is excessively expensive, they can decide to not recognize it as a legitimate business expense. As a rule, the threshold for such cases is 90,000 to 100,000 Swiss francs. However, the final decision on the recognition of tax deductions lies with the individual cantons.

Using a private vehicle for business purposes

The use of a private vehicle for business purposes can be a cost-effective option for both employers and employees. In this section, we will discuss the factors that determine the tax benefits of using a private vehicle for business purposes. We will also address the regulations to be followed and the potential risks associated with this practice.

The following points are relevant when a private car is used for the company:

• It is not necessary to declare a private share.
• The mileage must be recorded in a logbook (kilometers driven for business purposes).
• The company is not liable to pay for vehicle damage.

The use of a private car for business purposes offers potential for cost savings but is only fiscally advantageous in a few cases. To determine whether it is tax advantageous, some of the factors to consider include: the type of vehicle, the mileage, and the area of use.

If a private vehicle is used for business purposes, a flat reimbursement rate of CHF 0.70 per kilometer is usually applied to offset all costs such as petrol, repairs, insurance, and wear and tear. However, it is important to note that the commute to work cannot be included in this calculation. What this does mean is that the costs associated with the commute to work can be claimed as a deduction in the employee’s private tax return, as they bear these costs themselves.

Occasionally, employees are paid flat-rate expense allowances for the use of their private vehicle for business purposes instead of the usual compensation for actual kilometers driven. This saves the time and costs associated with keeping a logbook. However, these lump sums should roughly correspond to the costs that would be incurred if they were calculated according to actual kilometers driven. There shouldn’t be a hidden salary payment with a lump sum for vehicle expenses.

In rare cases, the employer does not reimburse an employee’s business travel costs. If this is the case, the employee may include these expenses as deductions in their private tax return (calculated with the use of the logbook method discussed above).

Why is a private vehicle preferred when making frequent and long-distance business trips?

For employees who make frequent and/or long-distance business trips, a private vehicle is often more advantageous. This is because the CHF 0.70/km reimbursement is often higher than the actual costs incurred for the travel. Furthermore, the reimbursement of travel expenses is free of tax and social security contributions. This effectively increases their tax-free remuneration. The effects are compounded if an employee drives an affordable and/or economical vehicle.