A change in the intended use of a property in which investment has been made – which will be used for both VAT-exempt and VAT-chargeable activities – allows for the recovery of input VAT on expenditure incurred during an investment spanning several years, even if the change in the property’s use took place before it was put into use.
Client's situation
Our client was carrying out a project involving the extension of a health resort facility, including a spa clinic. During the course of the project, the company purchased goods and services used in the construction of the property. Originally, the company assumed that the facility would be used primarily to provide medical care and services closely related to it, which are exempt from VAT. For this reason, input VAT on investment expenditure was not deducted on an ongoing basis.However, prior to the project being put into use, its intended use was changed. The property was to be used for both activities exempt from VAT and those subject to VAT.
The key issue was to determine how the company could reclaim the input VAT on expenditure incurred during the investment, which had spanned several years, given that the change in the property’s intended use had taken place before it was put into use.
The issue
DMS TAX’s task was to advise the client on how to reclaim the input VAT on expenditure incurred during an investment spanning several years, given that the change of use of the property had taken place before it was put into use.
Legal basis: Article 91(8) of the VAT Act.
Our approach
We have analysed the provisions concerning input tax adjustments, in particular Article 91 of the VAT Act, as well as the practice of the tax authorities regarding a change in the intended use of goods and services acquired in connection with the construction of a fixed asset. In a letter prepared for the client and addressed to the tax authority, we demonstrated that, in connection with the change of purpose of goods and services acquired for the construction of a fixed asset prior to its commissioning, Article 91(8) of the VAT Act applies.We pointed out that this provision allows for a one-off adjustment of input VAT in the return for the period in which the change of intended use took place. This meant that input VAT on capital expenditure incurred during the project’s implementation did not need to be recovered through a 10-year adjustment.
At the same time, we demonstrated that, as the property was to be used for both taxable and VAT-exempt activities, and it was not possible to allocate individual expenses exclusively to one type of activity, the deduction should be made on a pro rata basis.
Ruling and outcome for the client
Thanks to the arguments we put forward, the client was therefore able to reclaim a significant amount of VAT immediately following the change of use of the investment, without having to wait for it to be settled through annual adjustments.
Confirmation of DMS TAX’s arguments by the tax authority – a one-off adjustment to input VAT is possible
The tax authority accepted the approach we had put forward. As a result, the client received a one-off refund of a million in input VAT on expenditure relating to the investment, rather than having to claim the deduction over the 10-year adjustment period applicable to property.Thanks to the arguments we put forward, the client was therefore able to reclaim a significant amount of VAT immediately following the change of use of the investment, without having to wait for it to be settled through annual adjustments.