6.3.2.2 No recovery of VAT on immovable property used for private consumption

Before 2011, the VAT on expenditure related to immovable property forming part of the business assets of a taxable person and used both for purposes of the taxable person’s business and for private purposes, was fully deductible. The actual private use was taxed. Even though this VAT treatment was in line with the EU VAT rules of that time, the ‘financial advantage’ that taxable persons had compared to non-taxable persons was considered unfair.1 This resulted in the introduction of Article 168a in the EU VAT Directive, effective 1 January 2011. This provision is meant to ensure that taxable persons are dealt with in an identical manner whenever immovable goods that they use for their business activity are not used exclusively for purposes related to that activity. With a view to ensuring an equitable deduction system for taxable persons in the context of the new rule, an adjustment system of deductions is provided for which takes into account changes in the business and non-business use of the property concerned during a certain period of time.2

Under this new provision, in the case of immovable property forming part of the business assets of a taxable person and used both for purposes of the taxable person’s business and for private consumption, VAT on expenditure related to this property is deductible only up to the proportion of the property’s use for purposes of the taxable person’s business. Changes in the proportion of use of immovable property referred to in the first subparagraph shall be taken into account in accordance with the principles normally applied to changes of the use or application of such property between VAT exempt and taxed business activities, sometimes referred to as the ‘revision rules’ or the ‘capital goods scheme’.3

Under the same provision, Member States may also apply these rules in relation to VAT on expenditure related to other goods forming part of the business assets as they specify,4 because the ‘financing advantage’-issue also arises, though in a less significant and less uniform manner, with respect to movable goods with a durable nature.5

Even though Member States may regard as capital goods those services which have characteristics similar to those normally attributed to capital goods, they may, under the current EU VAT Directive, only do this for the application of the application of the ‘revision rules’.6 Under CJEU case law, an item which forms, in its entirety, part of the assets of a business and that was the result of alterations may be regarded as a separate capital item to which the above rules apply as well.7

As I will also explain below, some ‘free consumptive use’ of immovable business assets is not taxed, but the VAT on that use should still be deductible. Examples of this are the free use of a parking lot of a supermarket or even the ‘free access’ to the building in which that supermarket is located. This is free use ‘for the purpose of the business’ of that taxable person (see above). This means that these costs can be considered part of the general costs of a business and that they are, as such, components of the price of the goods or services which the business supplies. Such costs do have a direct and immediate link with the taxable person’s economic activity as a whole.8 The VAT on such costs can be deducted by the business insofar as it is allowed to deduct VAT. Another example of such an investment from CJEU case law is a freely accessible mythological exploration path that is used to attract people who can then purchase goods and services from the business that operates the path.9