If interest received has to be taken into account in the pro rata calculation, this limits the VAT deduction.
Interest in VAT
Interest is regarded in VAT as the consideration for making the financial resources available. Yet interest is not subject to VAT. Interest is subject to the VAT exemption for financial transactions.
This is in contrast to dividends. These are not seen as the consideration for the provision of capital, but merely result from the ownership of the shares from which the dividend is enjoyed. As a result, there is no transaction to be taken into account for VAT.
VAT deduction
Deduction of VAT encumbered on supplies and services purchased by the entrepreneur (the input VAT) is allowed if and insofar as these supplies and services are used for VAT-taxed transactions of that entrepreneur. The deduction for purchased goods and services used for both taxed and exempt transactions is determined using the so-called pro rata fraction. Deductible is this VAT multiplied by the fraction: taxed turnover/total turnover.
Notary office
At the North Holland District Court, the case of a notary office that realised a turnover of approximately €1,400,000 with its notary activities. This turnover is obviously taxed with VAT. The notary office had a trust account, which regularly held substantial amounts. On that account, the firm received around €114,000 in interest. The tax authorities stated that of the input VAT not solely attributable to the notary office's VAT-taxed transactions, the following was deductible: € 1,400,000 / (€ 1,400,000 + € 114,000). The notary office had deducted all input VAT.
Additional financial operations
Many entrepreneurs receive interest. Lately to a lesser extent on balances with banks, but on outstanding loans and other receivables. Often, this interest is not taken into account when assessing the deductibility of input VAT. A direct invocation of the VAT Directive is then made, knowingly or unknowingly. This stipulates that turnover from incidental financial transactions need not be included in the pro rata calculation.
Rechtbank Noord-Holland ruled that the third-party account for the notary was not an incidental act, but a direct, permanent and necessary extension of the taxable activity. Moreover, the relative proportion of the amount of interest earned to the total income indicates that there was no secondary activity. The court therefore followed the tax authorities' position.