Businesses deduct the VAT charged on incoming supplies and services. They do so provided that the business uses those incoming supplies for transactions subject to VAT.
Pro rata
To determine which VAT on an input transaction (input VAT) is deductible, you must follow these steps:
- Is the input tax (100%) used exclusively for transactions subject to VAT? In that case, the input VAT is fully deductible.
- Is the incoming service as a whole (100%) not used for transactions subject to VAT? In that case, the full input VAT is not deductible.
- The remaining benefits are mixed-use benefits, to which you must apply the pro rata rule.
The pro rata rule means that VAT is deductible in proportion to the VAT-taxable supplies out of the total supplies. The general rule is that you must calculate this proportion on the basis of turnover in euros. Only if the actual use of the mixed-use supplies provides a more accurate picture may the pro rata calculation be based on actual use. A pro rata calculation based on actual use could, for example, be based on square metres.
If, as a business owner, you wish to base the pro rata calculation on actual usage, you must provide evidence that this gives a more accurate picture. If the tax authorities wish to base the pro rata calculation on actual usage, they must provide evidence to support this.
Separate distribution keys
A case was recently heard at the Court of Appeal in Den Bosch case in which the business owner wished to base only part of the input VAT on actual use on a pro rata basis. This case concerns a private limited company (BV) that provides childcare (childcare is a VAT-exempt activity). In addition, a digital platform has been developed, which is also used by third parties. The fee charged for use by third parties is subject to VAT.
On the basis of the turnover ratio (in euros), the BV 2% may deduct the input VAT on services used for mixed purposes. The company calculates the actual VAT-taxable use of the digital platform, based on the number of connections to that platform, as 63%. The company argues that, of the VAT incurred on the costs of the digital platform, 63% is deductible. Of the VAT on the other mixed-use costs, 2% is deductible. The main issue, of course, concerns the VAT paid in connection with the development of the digital platform.
However, the Court of Appeal in Den Bosch did not agree with this and ruled that the pro rata allocation must be determined for the company as a whole. The private limited company has not provided any evidence to support the claim that the pro rata allocation should be based on actual usage (such evidence has only been provided for the costs of the digital platform).
An appeal in cassation has been lodged against the Court’s judgment.