Buying a car in 2022:
what are the current tax rules?

Total cost of ownership: Hybrid vs Diesel

As of January 1st, 2020, the deductibility of car expenses is determined based on a new formula for both the sole traders and the company structures. This new formula has a negative tax impact for companies owning petrol and diesel cars. In short, the deductibility of car costs for the same petrol or diesel car is now lower than it was before.

All car costs, including fuel costs that used to be deducted at a flat rate of 75%, now have to be deducted as a percentage determined by the new formula. A positive note: the financing costs of your car remain 100% deductible.

In addition, as of January 1st 2021, a new method is being used to determine CO2 emission levels for brand new cars. For every new car in the future, a CO2 emission level will have to be determined according to the Worldwide Harmonized Light vehicle Test Procedure. The WLTP is a more stringent test and leads to higher CO2 emission levels. To state the obvious, car taxation has undergone serious tightening in recent years. That is why we have drawn up some simulations that clearly frame the new legislation and give you an overview of the changes.

Entrepreneurs who are planning to buy a new car would do well to investigate the Total Cost of Ownership of their new car. That amount not only takes into account the purchase value of your car, but also all other costs associated with owning (and driving) the car. To find out the TCO of your new car, we therefore also have to estimate the number of kilometres that you will travel with it per year.

Unsurprisingly, investing in a classic petrol or diesel car will only be more disadvantageous due to the recent reforms. Our simulation will show that in many cases it is financially interesting to invest in a slightly more expensive hybrid car.

Our simulation compares 2 different models of the same type of car, namely the Mercedes-Benz A180d and the Mercedes-Benz A250e. Below you can see the specifications of these 2 models side by side.

Reforms

Below, you can see what these recent updates mean in terms of calculating the deductible amount.

1: Introduction of a new formula: Purchasing a new car as of January 1st 2020

2: Introduction WLTP: Purchasing a new car as of January 1st 2021

Important to notice is that many cars on the road today still have an NEDC emission level due to the fact that the WLTP method is only used to determine the CO2 emission levels for brand new cars. Car owners who have a car with a known NEDC emission level, will therefore still be able to follow the NEDC system. As of January 2021, all CO2 emissions for brand new cars levels will be determined using the WLTP standard, the stricter method.

Total cost of ownership

In this simulation, we assume that there is no private contribution and all fuel and electricity costs will be taken care of by the legal company structure. This means 40 percent of the benefit in kind will be added to the disallowed expenses and will therefore be taxed through the company.

In the comparison below, focus on the catalog price relative to the total cost of ownership. Although the hybrid car is more expensive to buy, it's almost €30.000 less expensive in TCO after 5 years of ownership.

1: A250 E (hybrid)

2: A180 D (diesel)

To determine the total cost of ownership, we will have to take following costs in to account:

• Annual driving tax

• Road tax

• Amortization

• Fuel cost

• Insurance

• Non-deductible VAT

• Disallowed expenses

Below a visual representation of the difference in TCO between both models.

1: A250 E (hybrid)

2: A180 D (diesel)

In conclusion

The introduction of these new reforms ensure no more forfait rates and a unique deductibility rate for every car.

As illustrated, the deductibility rate fort the Mercedes A-class diesel variant is 69%, whereas the costs for the hybrid variant can be deducted entirely.

Pay attention to the catalogue value and the resulting TCO of the two vehicles in this simulation. Although the diesel car is cheaper in purchase value, it is a lot more expensive than the hybrid variant over a period of 5 years, with 25,000 kilometres being driven annually.