The tax tribunal has once again considered the deduction of VAT under the pro rata scheme. The Court of Appeal in The Hague has ruled that theoretical turnover must not be taken into account.
Property lettings
The case concerns a business owner who lets out residential properties (flats) and commercial property. The letting of residential properties is a VAT-exempt supply. The letting of commercial property is generally subject to VAT, but if the landlord does not carry out 90% or more supplies for which there is a right to deduct VAT, the letting must be exempt from VAT.
However, the landlord in this case wished to let some of the flats subject to VAT. This is permitted in the case of short-term lets to different tenants (lets for periods of up to six months are still regarded as short-term in this context).
This is also known as short-stay letting. It is not in dispute that the landlord does indeed intend to use the properties for short-stay letting (see also our article on this subject VAT deduction whilst the property is vacant).
Vacancy rate
The problem, however, is that it is not possible to let the properties in this way. The properties remain vacant for a while and are eventually let on a long-term basis. A dispute arises with the tax authorities over how the deductible VAT should be calculated during the period of vacancy.
The VAT relating exclusively to the flats intended for short-stay lettings is deductible. After all, that VAT relates entirely to the intended operation of the properties, which is subject to VAT. The dispute with the tax authorities concerns the VAT that is not directly attributable to taxable or exempt supplies.
The extent to which that VAT is deductible must be determined using the so-called pro rata scheme. The general rule is that VAT which is not directly attributable is deductible in proportion to the taxable turnover as a percentage of total turnover.
The tax court does not agree with the interested party’s argument that the taxable turnover should be increased by the expected rent for the vacant dwellings (theoretical turnover). According to the court, the party concerned has failed to provide sufficient evidence that this would better reflect the actual use of the services purchased.
An attempt to apply the pro rata apportionment to only part of the services recently failed before the Supreme Court. We discuss this judgement in our article Pro rata VAT – not partial.