VAT may be deducted if and to the extent that traders carry out transactions subject to VAT. Traders who carry out both transactions subject to VAT and those exempt from VAT must allocate the VAT on goods and services purchased (input VAT).
Pro rata
That allocation is made on the basis of the pro rata arrangement. The deductible VAT is calculated as follows:
(turnover subject to VAT / total turnover) * input VAT.
This allocation is based on the turnover achieved in euros during a calendar year (the turnover ratio). A different method of allocation is permitted if it leads to a more accurate determination of the actual use of the goods and services purchased.
Direct allocation
Before the pro rata rule is applied, it must be assessed whether the input VAT is fully deductible. The input VAT on purchased goods and services which:
- are used exclusively for VAT-exempt supplies: are not deductible at all;
- used exclusively for services subject to VAT: is fully deductible.
Gelderland District Court
The Gelderland District Court recently ruling This ruling was made in a case concerning the question of whether, for the purposes of the pro rata scheme, an allocation method differing from the turnover ratio could be used. The business in that case was a property developer (a private limited company). This company carried out both VAT-taxable and VAT-exempt projects. The property developer did not employ any staff. The work was carried out by the directors-major shareholders. They worked for the property developer through their own private limited companies. These private limited companies charged management fees, which were, of course, subject to VAT.
The question is to what extent the project developer may deduct the VAT charged on the management fee. Both directors work on both VAT-taxable and VAT-exempt projects. Direct allocation of input VAT is therefore not applicable. The deductible VAT must be determined on a pro rata basis.
He who alleges must prove
The Court agrees with the property developer that it is plausible that the turnover ratio in euros gives a distorted picture of the actual use of the goods and services purchased. The burden of proof for a different ratio rests with the project developer. After all, the project developer has argued that a ratio deviating from the main rule provides a more accurate picture.
However, the timesheets for the directors submitted by the project developer are not sufficiently accurate to substantiate the deviation in the turnover ratio. The timesheets were reconstructed retrospectively, following an investigation initiated by the tax authorities, on the basis of the directors’ diaries. However, too many assumptions were made, which cannot be sufficiently verified. General tasks, such as visits to the accountant, were allocated exclusively to VAT-liable projects. Projects that did not go ahead were counted as VAT-liable projects, whilst it was unclear whether these projects would actually have generated VAT-liable turnover.
Consequently, the Court does not consider the method of calculation based on these timesheets to be any more accurate than the calculation based on the turnover ratio. The additional tax assessment issued by the Tax and Customs Administration on the basis of the turnover ratio remains in force.
Fine
The Court also upholds the fine. The full deduction of input VAT on exempt and mixed supplies constitutes gross negligence. This remains the case even if an error were involved. According to the Court, this error is too fundamental. The Tax and Customs Administration had previously reduced the fine from 25% to 10%.