A VAT-registered business must deduct the VAT paid on input supplies (input VAT). However, this is subject to the condition that these supplies are used for VAT-taxable outgoing supplies. If they are used partly for VAT-taxable supplies, the input VAT for that portion is deductible.
Resolution
In order to deduct VAT, a VAT-registered trader does not yet need to have actually supplied services subject to VAT. The intention to do so is sufficient. The Court of Justice of the European Union has already ruled on this in its judgment handed down in 1996 INZO. But, of course, you must be able to make that intention sufficiently plausible.
This is the subject of a ruling of the Gelderland District Court. X BV holds shares in various private limited companies. X BV lends €200,000 to one of these companies. The purpose of the companies is to bring employers and employees together. X BV will also carry out management tasks for the subsidiaries. The group was restructured and, amongst other things, X BV deducts the VAT it pays on the associated (consultancy) costs. Partly due to the economic crisis, the activities have failed to get off the ground.
Following an audit, the Tax and Customs Administration is adjusting that deduction. A late payment penalty of 10% is being imposed on the additional VAT assessed.
VAT-registered business
It is not in dispute that X BV is a VAT-registered business. This is because the company derives income (interest) from the provision of the loan. But surely you don’t pay VAT on interest? That is correct. The provision of funds by way of a loan is a VAT-exempt supply. However, the provision of the funds is a supply in the course of economic activity; a supply for which there is consideration (the interest). This is sufficient to qualify as a business activity for VAT purposes.
As a result of the loan granted, X BV is considered to be a trader. However, as the lending of funds is a VAT-exempt supply, no input VAT deduction can, of course, be claimed in respect of this supply.
Proof
To provide evidence of the deduction of VAT in connection with intended taxable transactions, the VAT-registered business must demonstrate, on the basis of objective data, that (see the decision (on VAT deduction):
- he is a VAT-registered trader in respect of the intended but uncompleted transactions (see above);
- intends to carry out transactions subject to VAT;
- there is a direct link between the purchase of the goods and services and the taxable transactions to be carried out.
X BV did not provide the court with any documents showing exactly what work it intended to carry out, or for what remuneration. It submitted invoices for management work carried out for third parties, but these related to previous years. The court does not regard the statement made by the director and major shareholder of X BV before the court regarding the intention as sufficient objective evidence.
X BV also failed to demonstrate that there is a direct link between the costs of the restructuring and the proposed management activities subject to tax. X BV argues that the restructuring was necessary in order to carry out the activities properly. However, according to the court, it is not at all necessary to be a shareholder in order to carry out management activities.
Blue eyes
The moral of this ruling is: if you deduct VAT in anticipation of future taxable supplies, make sure you have a sound case. Preferably backed up by written evidence. The tax authorities won’t take your word for it.