7.2.4 Case 4

The same case, but the accountancy firm is replaced by an insurance company.

As the insurance company orders the construction of the building, the insurance company makes a self-supply when it puts the building into use. It cannot deduct the VAT payable in respect of the self supply to the extent that this VAT is attributable to the three floors it puts into use. It is not clear whether it can deduct the input VAT attributable to the 4t^h floor while this floor is not taken into use.

There is no self-supply in the UK as the construction services will bear VAT. As long as the insurance company has the intention to use the 4t^h floor for its own exempted purposes it is not entitled to deduct the input VAT attributable to this floor. Adjustment under Regulation 109 can only take place if it can be proved that the intention to use the 4t^h floor for taxable purposes has changed, i.e. by exercising the option to tax.1

There is no self-supply in Germany as the construction services will bear VAT. Since the insurance company did not intend to use the building (entirely or parts thereof) for the purpose of taxable transactions, it can only deduct the input VAT on the construction cost according to its pro rata key.2 As long as this intention does not change, there is no room for a VAT adjustment.3

There is no self-supply and there is no adjustment as long as the 4t^h floor is not used for taxable transactions allowing the VAT recovery. In this respect, the insurance company will only be able to recover the VAT further to its VAT recovery ratios and the adjustment will only occur if there is a significant change in the ratio4 or if the floor is allocated to transactions allowing VAT recovery.5