A VAT-registered business may deduct the VAT charged to it.
Attractive
VAT is deductible if and to the extent that the goods or services purchased are used for transactions subject to VAT. In addition, the supply in respect of which VAT deduction is claimed must have been made to the business. A detailed explanation of the conditions you must meet to make VAT deductible can be found in our note Deduction of VAT.
In order to substantiate the VAT deduction, the business owner must have a VAT invoice. We have set out the requirements that a VAT invoice must meet in our memorandum The invoice for VAT purposes.
A direct and immediate link
The deductibility of VAT was the subject of discussion in a case which was recently decided by the Court of Appeal in Den Bosch. An audit by the Tax and Customs Administration revealed that a private limited company (BV) had deducted all input VAT on consultancy and legal fees. Part of these costs related to proceedings concerning the income tax (IB) owed by the director and majority shareholder (DGA) of the BV.
The Tax and Customs Administration concluded that 30% was not eligible for VAT deduction. This VAT was subsequently assessed. Naturally, late payment penalties were also imposed and tax interest was calculated.
According to the private limited company, no agreement had been reached with the advisers regarding the procedures relating to its director and major shareholder’s income tax. The advisers had not charged any fee for this either, as the work involved was negligible. However, the Tax and Customs Administration has submitted documents showing that the proceedings in question relate in part to the director and major shareholder. These proceedings are, in fact, explicitly mentioned in the documents. The Court of Appeal therefore considers it implausible that the fees paid by the private limited company did not also relate, at least in part, to these procedures. The private limited company has failed to demonstrate that payment was made solely for the work carried out on its behalf.
The private limited company also argues that the costs of the proceedings concerning the director-shareholder’s income tax are directly related to its business. However, this does not render the VAT charged on those costs deductible. According to the Court of Appeal, European case law shows that deductibility requires a direct and immediate link between the costs and the economic activity of the private limited company. In other words: without the company, there would have been no legal proceedings.
30% not deductible
The 30% relating to non-deductible VAT has been determined by the Court. The Court took into account that the proceedings relate to three tax matters. One of these, amounting to (approximately) one-third (30%), concerns the director-shareholder’s income tax. The Tax and Customs Administration initially regarded 45% of the VAT as non-deductible, but reduced this to 30% in the course of the proceedings.
In the proceedings, the director and major shareholder argues that only 5% of the costs relate to his income tax. However, his justification for this percentage is rather flimsy. He merely states that, for the income tax proceedings, the documents from the other proceedings were copied. The Tax and Customs Administration refutes this argument by stating that the documents for the proceedings concerning the private limited company may well be copies of the documents relating to personal income tax.