New rules limit the recovery of VAT on expenditure related to business assets used for private purposes
Deloitte Belgium Tax Quarterly, Issue 43 - March 2011
Since 1 January 2011, the recovery of VAT for “immovable property, other assets and services which are subject to the revision scheme and form part of the business assets of a taxable person” is limited when these assets are used for both business and other purposes. The new provision states that a taxable person is only allowed to recover the VAT charged on expenditure “related to these assets” to the extent they are used for business purposes; to the extent they are used for non-business purposes, the VAT recovery is not allowed. As such, this is a clear rule. However, the practical application is far from clear.
Purpose of the new rule
The new rule transposes a new regulation that was laid down in the European VAT Directive. The rule aimed to ‘neutralise’ (for the treasury) the negative effects of case law in the European Court of Justice (ECJ).
The ECJ ruled that a taxable person had the choice to treat any investment, “in its entirety, as part of the assets of his business”. This position had a double consequence. Firstly, if the choice was made to include the asset into the business assets, the VAT incurred on the acquisition of the asset was in principle fully recoverable. Secondly, the private use of the asset gave rise to the payment of VAT (on the assessed fringe benefit) as long as the private use continued. However, as the incurred VAT could be fully recovered immediately but the private use resulted in a spread payment of the VAT, it was clear that the ECJ viewpoint entailed a ‘benefit’ for taxable persons. A concrete example illustrates this ‘benefit’. The ECJ position made it possible that a new house was purchased by the management company of a person (the manager of the company). The company would put the house at the disposal of the manager. This would give rise to a fringe benefit, subject to VAT, computed on the value of the fringe benefit. However, the company could immediately claim back the full amount of VAT incurred on the purchase.
The member states disagreed with this position and tried to counter it. For instance, the Belgian VAT authorities tried to limit the application to specific situations. However, this position was criticised, not only in doctrine but also in other case law of the ECJ.
In the end the EU Council opted to put the case law aside via a change of the VAT Directive.
VAT recovery immediately limited
According to the new provision of the VAT Directive, VAT which is incurred on expenditure related to an immovable property forming part of the business assets of a taxable person, and used both for business and other purposes shall be deductible “only up to the proportion of the property’s use for purposes of the taxable person’s business”. Furthermore, member states may apply the same deduction limitation to VAT incurred on “expenditure related to other goods forming part of the business assets as they specify”. At the same time, the private use will no longer give rise to taxation as a fringe benefit for VAT purposes.
This change of the VAT Directive needed to be enacted by the member states in their national legislation; ultimately on 1 January 2011.
The Belgian legislator decided to apply the new VAT recovery limitation to both immovable property and other tangible and even intangible assets which are part of the business assets (new articles 45, § 1quinquies and 19, § 1 of the VAT Code).
The new regulation implies that taxable persons have the obligation to determine, when acquiring business assets, to which extent the business goods and services as well as ‘related’ expenditure’ will be used for business and other purposes. The ‘business element’ of the VAT incurred on the expenditure will immediately be recoverable according to the general VAT recovery position of the taxable person, while the other part related to non-business use will no longer be recoverable.
At the same time, the Belgian legislator modified the provisions that assimilate the private use of a business asset to a service, in order to avoid double taxation. The use of a business asset of a taxable person for purposes other than business which previously gave rise to a VAT taxation of the fringe benefit is no longer assimilated to a taxable supply of services if the business asset has been subject to the recovery limitation rule.
In case of a change in the proportion of the business/non-business use of an asset, i.e. after the initial VAT recovery, the revision regime should be applied to reflect the change (one fifth or one fifteenth of the initially recovered VAT in accordance with the normal VAT revision scheme).
Leased goods are not affected
What is the new regulation’s scope of application?
The new rules apply to tangible and intangible goods which are considered to be business assets for VAT purposes. Leased and rented goods are not business assets (irrespective of the treatment for accounting requirements) in the hands of the users, and therefore do not fall under the scope of the new regulation. Hence, leased and rented goods are not subject to the new VAT recovery limitation in the hands of their user. Therefore, leased company cars and laptops, inter alia, are not affected by the new provisions, and will remain subject to the regulation that was applicable in the past, including the taxation of the fringe benefit.
Also, business assets with a value of less than 250 € are excluded from the new regulation.
The large scope of application however entails a number of questions, which, at the moment of writing, were not solved.
Firstly, the new VAT recovery limitation does not only envisage the VAT incurred on the acquisition of the business assets themselves, but also on ‘related’ goods and services. In this respect, the question of which VAT ‘related’ to business asset is affected comes up. The text in the new regulation seems to indicate that the recovery limitation rule would in principle apply, inter alia, also to VAT incurred on maintenance costs related to a house used for both business and other purposes, or VAT incurred on winter tyres installed on a company car used for both business and private purposes. However, the scope of this ‘extended’ application is not fully clear at this stage. Whilst the expenditure seems to ‘relate to’ the investment goods for the above-mentioned examples, the situation is less clear for other types of expenditure (e.g. VAT incurred on an internet subscription fee).
A second question is whether business assets acquired prior to 1 January 2011 are also subject to the new provisions. The State Secretary of Finance confirmed that the new VAT recovery limitation does not apply to investment goods acquired before 1 January 2011, i.e. where the VAT incurred on the acquisition has become due prior to 1 January 2011. This statement of the State Secretary thus seems to suggest that for the investment goods acquired prior to 1 January 2011, the old regime would remain applicable, including the payment of VAT on the fringe benefit. But at the same time, the modified text of article 19 § 1 VAT Code seems to imply that fringe benefits can no longer be taxed , even for business assets acquired prior to 1 January 2011. So how is the non-business use then to be taxed?
Thirdly, how does one determine the scope of private use of an investment? For buildings, this seems to be feasible, based for instance, on the number of square metres assigned to the part of the building used for private purposes. However, for laptops and mobile phones, the determination of private use is far less evident. Under the previous regulation, this was solved by determining a lump sum amount serving as the taxable basis for the fringe benefit (e.g. 180 euro per annum for a PC). Could such a lump sum determination of private use also be a solution to determine the VAT recovery limitation? Possibly, there is however no legal basis to do so. This practical solution equally gives rise to another problem: is this recovery limitation then to be only in the year of acquisition or to be repeated for every year during which the asset is used for business purposes?
Last but not least: what about company cars?
First of all, as explained, leased company cars are not affected by the new regulation. Hence, they continue to be as they have previously done, subject to the general 50%-recovery limitation combined with a VAT taxation of the fringe benefit (which also is a double taxation).
The new regulation thus only applies to owned company cars. But how does the new recovery limitation coincide with the existing 50% recovery limitation for cars?
In the parliamentary preparation of the new regulation, the State Secretary for Finance said that a distinction is to be made on whether the business use of the car does or does not exceed the 50%. If the business use of a company car is less than 50%, the new recovery limitation would apply. The VAT recovery is then based on the percentage of business use of the company car. In that situation, there is no VAT on the benefit in kind. However, if the business use of a company car is equal or superior to 50%, the 50%-limitation applies, in which case there still would be a VAT on the benefit in kind.
The question is whether this viewpoint is correct. It entails that cars also fall under the new regulation’s scope (sometimes combined with the existing 50%-limitation rule). Does it then make sense to say that VAT is still due on the fringe benefit, but only if the business use exceeds 50%?
Administrative circular to be expected
It has become clear that the large scope of application of the new regulation raises more questions than the legislator may have anticipated. The Belgian VAT authorities are preparing a circular letter on the new regulation which hopefully will solve the issues mentioned above. At the time of writing, it was not clear when this administrative comment would be published.
In any case, it seems that the new regulation will not make it easy for a business to determine the scope of the non-business use of an individual business asset, and hence to limit the recovery of the VAT paid to the extent of this non-business use. Also, another question is how to process the limited recovery of the VAT paid on the acquisition of the business assets in the ERP set up?