What is the basis for claiming VAT deduction on items used for both business and private purposes?
HRe boiler
Private individuals who supply electricity generated by solar panels to the electricity grid are regarded as traders for VAT purposes. The VAT payable on the purchase of the panels is therefore deductible. The same applies to a so-called HRe boiler, which generates electricity by means of a micro-CHP (combined heat and power) system. If the electricity, which is not used immediately, is supplied to the electricity grid, the owner of the boiler, just like the owner of the solar panels, is a VAT-registered business.
Property
An important difference between the HRe boiler and (most) solar panels is that the boiler forms an integral part of the property in which it is installed. Consequently, the portion of the VAT charged on the purchase that must be allocated to private use is not deductible. Most solar panels qualify as movable property, meaning that the VAT is fully deductible and VAT must subsequently be paid on the private use (although most solar panel owners have then opted for the small business scheme).
Output
The HRe boiler produces heat (hot water and heating), which is used entirely for private purposes, as well as electricity that is used for private purposes, the surplus of which is supplied to the electricity grid subject to VAT. The VAT paid on the purchase of the boiler is deductible to the extent that the boiler is used for VAT-taxable transactions.
To this end, the so-called pro rata fraction must be determined. The VAT is deductible in the ratio: taxable turnover / total turnover. The question is how private use should be taken into account in the denominator of the fraction. Arnhem-Leeuwarden Court of Appeal holds that the burden of proof lies with the party claiming VAT deduction and that the output approach must be applied. In respect of electricity generation, this must be based on the price received for the electricity supplied. For heat, the value that this heat has for the end user (the consumer) must be taken as the basis.
The operator of the HRe boiler had argued that the pro rata deduction should be determined on the basis of profit allocation. In this context, the denominator of the pro rata fraction is determined on the basis of the economic value of the heat and electricity produced, less the production costs. The Court of Appeal ruled that this wrongly takes into account an unprofitable by-product.