The Supreme Court has ruled that the deduction of VAT under the pro rata scheme applies to all mixed-use supplies taken together, and not just to part of those supplies.
Exclusively
This concerns the deduction of VAT on purchased goods and services. Before we consider the application of the pro rata rule, we must determine whether a purchased good or service is used exclusively for supplies subject to VAT or for supplies exempt from VAT. If that is the case, the VAT is either fully deductible or not deductible at all.
For VAT on all other goods and services purchased (mixed supplies), the pro rata rule is used to determine which portion of the VAT is deductible.
Main rule
Under the pro rata scheme, the extent to which VAT is deductible is determined on the basis of the ratio of VAT-taxable turnover to total turnover. That is the general rule.
Where a proportion based on the actual use of the mixed supplies leads to a better result, the extent of the VAT deduction may be determined on the basis of actual use. Any party who considers that the exception applies must provide evidence to support this.
Not partially
The case before the Supreme Court concerns a business owner who provides childcare. Childcare is exempt from VAT. However, the business owner has also developed an IT platform specifically for childcare, which is made available to third parties. That supply is subject to VAT. The IT platform is used both for the business’s own childcare services (exempt from VAT) and made available to third parties (subject to VAT). VAT on the purchase of goods and services for the platform must therefore be deducted on the basis of the pro rata scheme.
It goes without saying that the turnover ratio in euros does not come close to reflecting the actual use of the ICT platform. The business owner therefore wishes to base the VAT deduction for the ICT platform alone on the ratio of its actual use in their own childcare centre to its provision to third parties. The business owner wished to base the deduction of the remaining mixed VAT on the turnover ratio.
However, the Supreme Court has ruled that all mixed supplies must be taken into account. Only where a more accurate VAT deduction can be arrived at for all mixed supplies on the basis of actual use may actual use be applied.
Incidentally, the VAT Directive does allow EU Member States to permit partial pro rata allocation. However, the Netherlands has not made use of this provision. Perhaps this judgement will prompt the Dutch government to amend the law in this regard.