If you are a business owner and carry out VAT-taxable supplies, you may deduct the VAT on input supplies.
When do you deduct VAT?
In the tax return period during which your supplier issues the invoice to you. The date of the invoice is the decisive factor. The tax return period is the period for which you submit your VAT return. Many business owners submit their VAT returns quarterly, others monthly, and some annually.
Example
You file your tax returns quarterly and receive an invoice from a supplier dated 20 September 2017. You pay the invoice on 2 October 2017.
You should then deduct the VAT shown on this invoice in your VAT return for Q3 (the quarter to which September belongs).
Even if you use the cash basis method for VAT returns, you should deduct the VAT in the tax return period in which the invoice date falls.
You enter the VAT deduction in section 5b (“input tax”) of the VAT return. You should also enter any corrections to the deduction there.
Actual use
You must deduct VAT if, and to the extent that, you use the service you have purchased for VAT-taxable transactions. You MUST! Case law has confirmed that deducting VAT is not a matter of choice. It is an essential part of the VAT system.
If you do not use the purchased service immediately, you must estimate how you will use it. If, when you actually start using the service, it turns out that your estimate was incorrect, you must reverse the deduction you have made, or you may still claim the deduction.
Revised
The VAT deduction will then be reviewed. The VAT on goods supplied to you goods you must carry out a review in the year of commissioning and in each of the following 4 or 9 years (4 years for movable property and 9 for immovable property).
For VAT purposes, goods are defined as tangible objects that can be controlled by humans. In addition, electricity, gas, heat and cooling are classified as goods. All services that do not constitute a supply of goods are, for VAT purposes, services. For services, there is no obligation to review the VAT deduction in the years following the calendar year in which they were first used.
Costly services should be reviewed
This is likely to change. The Ministry of Finance has, in this context, submitted a bill for public consultation online. The aim is to extend the revision to include capitalised services. These are services that are used by the company over a longer period of time. This is usually reflected by capitalising these services on the company’s balance sheet.
Example
Your private limited company owns a property in which the business is carried out. The company is carrying out extensive refurbishment work on the property. However, the refurbishment is not so extensive as to constitute a newly constructed property. For VAT purposes, the refurbishment therefore qualifies as a service. The extent to which the VAT charged on the refurbishment costs is deductible must be assessed only in the calendar year in which the property is brought into use.
Suppose you use the premises entirely for VAT-taxable activities in the year they are brought into use. In that case, all VAT charged on the renovation costs is deductible. After two years, it turns out that the premises are too small after all. The private limited company sells them VAT-exempt.
In that case, the VAT deduction on renovation costs will remain in place under current legislation. After all, there is no need to amend that.
Once the revised scheme for high-value services has been introduced, you will be required to repay part of the VAT deducted during the renovation.
As well as renovation work, examples of high-cost services include installing an air-conditioning system, a combined heat and power system and similar systems in a property.
In the context of the conversion (transformation) of commercial property into residential units, the right to deduct VAT on the conversion costs is effectively safeguarded by using the converted residential units for so-called short-stay lettings in the year they are first occupied (subject to VAT at the reduced rate of 6%). If the properties are subsequently let or sold VAT-exempt, the VAT deducted on the renovation costs does not need to be adjusted under current legislation.
With immediate effect
It is unclear whether the revision will be introduced with immediate effect for high-cost services. In our view, however, this seems the most likely outcome.
If that is the case, you may face an unexpected adjustment claim relating to high-value services you have purchased in the past. Can you prevent this? Sometimes yes; sometimes no. If you wish to avoid having to pay VAT as a result of a reassessment of the deduction on high-value services, you may need to act swiftly in anticipation of a forthcoming legislative proposal. The change could well form part of the tax plans to be unveiled on Prinsjesdag.
VWGNijhof would be happy to discuss the possibilities – and limitations – with you.
Implementation postponed
We had assumed that the revised scheme for high-value services would be introduced with effect from 1 January 2018. However, during the debate on the draft legislation setting out the tax plans for 2018, the State Secretary for Finance indicated that this date would not be met. It is not yet known when the new rules will be introduced.