At the beginning of August, a Supreme Administrative Court ruling that rejected a claim for a VAT deduction on a purchased vehicle due to an incorrectly kept journey log resonated in the media. Since July of this year, the tax authorities have been entitled to request camera records of vehicle movements from the Police of the Czech Republic for tax administration purposes. The question arises: What about the obligation to keep a proper journey log so as not to incur unnecessary tax risk?
I always smile when I hear that the journey log is now a thing of the past, and that thanks to the use of flat-rate transport expenses there is no need to keep one. Some brave souls were even convinced that they could "recolour" the journey log several months or even years going back. So let's take a detailed look at the obligation to keep a journey log for each type of tax.
There is really nothing in the VAT Act about this obligation. But paradoxically, it is VAT where proper bookkeeping is most important. The taxpayer is entitled to deduct only those transactions received which they use for their economic purposes. The private use of a vehicle does not really fall under these purposes.
The VAT Act states that in the case of mixed use of property, the taxpayer may claim a VAT deduction only in the proportion that is used for its outputs that are eligible for the deduction. Although the law does not provide a specific procedure for determining this ratio, according to administrative practice, a properly kept journey log is a recognised means of proof.
Underestimating the proper maintenance of the journey log puts the taxpayer in an unenviable position in the event of a tax audit. The taxpayer may still prove business trips in another way, but in practice this is very difficult. It is worth pointing out that the tax authorities have long had software at their disposal to determine whether a submitted journey log is genuine or whether there is something the matter with it. The possibility of requesting CCTV footage from the police is therefore just one of the other means of support that the tax administrator can use when in doubt about the credibility of a journey log. In addition, it can also cooperate with the vehicle inspection authority (STK) to verify odometer readings. Of course, the tax authorities can also verify individual business meetings with business partners quite easily.
Already when claiming a deduction for the purchase of a vehicle, the taxpayer must determine or estimate the proportion in which the vehicle will be used for economic purposes. In practice, I do not recommend estimating 100% of the use for economic purposes, as this is often a red flag for the tax authorities. An estimate of 80-95% is commonly used. However, if the car in question is replacing a scrapped car, the estimate should be based on the proportion in which the scrapped car was used. In the last taxable year of that same year, the taxpayer will adjust the estimated deduction to reflect the actual claim.
However, this is not the end of the story from a VAT perspective. For the next four years after the year of purchase, the taxpayer monitors the vehicle and if the ratio decreases by more than 10%, they must still adjust the deduction and reimburse part of the VAT to the state. Of course, it works the other way round too, i.e. it is possible to reclaim part of the deduction if the ratio increases by more than 10% compared to the first year.
In the area of VAT, it is annoying that the right to deduct is assessed for each supply received. In practice, this means that the VAT on each receipt relating to the operation of a vehicle is subjected to a simple test for full or partial entitlement to deduction. When the car is used for mixed purposes, the taxpayer is again only entitled to a partial deduction. These include, for example, fuel, washing, servicing, maintenance, operating lease payments. For these operating expenses, it is a one-time reduction; the taxpayer does not return to them in subsequent years.
In practice, the above-mentioned proportional entitlements to deduction are normally determined and proven by properly maintained logbooks.
The worst-case scenario for car running costs is that the tax administrator "cuts" a few thousand crowns a month from these running costs. The tax administrator can go back up to three years when assessing the deduction, which means that the resulting reduction can be 36 times the monthly amount.
Here I can confirm that if you are not a VAT payer, there are situations where you do not have to keep a journey log. This is due to the provision on flat-rate expenses on transport by road motor vehicle. This is CZK 5,000 per vehicle (or CZK 4,000 for individuals if used for private purposes).
The flat rate can be used for up to three privately owned road vehicles. This article does not deal with the conditions for being able to use this scheme; however, I definitely recommend consulting a tax advisor before using it because of the various non-standard conditions. Of course, fuel and parking expenses cannot be claimed as tax expenses for these vehicles.
However, if the flat-rate transport expense is applied, the taxpayer does not really have to prove anything to the tax authorities. It is worth mentioning here that if the taxpayer is an accounting entity, it is still obliged under the Accounting Act to account for individual documents, for example for fuel. This is because the flat-rate transport expense is purely an income tax matter, not an accounting one.
However, when a taxpayer cannot or does not want to use the flat-rate transport expense, they can only claim as tax expenses those actual expenses that are related to the attainment, provision or maintenance of taxable income. And this is normally proved again by a journey log.
As a point of interest, if a company assigns a vehicle for private use to an employee, the company only has to prove tax deductibility for fuel. Other operating costs are treated as primarily tax deductible for income tax purposes.
GFD Instruction D-22 gives some guidance on what the journey log should contain:
"For the purpose of claiming tax expenses on fuel under Section 24(2)(k) of the Act, unless the tax administrator provides otherwise, the taxpayer shall keep a journey log in such a way that the expenses so incurred can be proven. At least the following information must be entered in the journey log: date of journey, destination, purpose of journey, kilometres travelled. In addition, the taxable person shall keep details of the type of vehicle, the registration mark (registration plate), the mileage as of 1 January (or the date of commencement of the activity or use of the vehicle) and 31 December of the calendar year (or the date of cessation of the activity or use of the vehicle)."
I would also add that if the tax administrator disputes the journey log during the audit and it is impossible to prove the business trips otherwise, you can propose to the tax administrator the use of the flat-rate transport expenses. Of course, if you meet the conditions for applying this scheme.
While one might assume that the journey log would be very important for this tax, the opposite is true. In fact, for the purposes of road tax, a journey log does not need to be kept.