Opportunity: AG provide an interesting opinion on the right to deduct input VAT where there is a business/non business mix

Friday, May 29, 2015

by Nick Ryan

Following the release of the AG’S opinion in the Lithuanian Sveda UAB ECJ VAT case we now wait to see if the Court decides to follow this ruling which could provide taxpayers involved in both business and non business activities with opportunities to enhance their level of input VAT recoveries.
This could provide opportunities for the Charity sector in its quest to minimise the VAT burden imposed on it.
The gist of the case concerns the development of a tourist trail by Sveda funded by the Lithuanian Ministry of Agriculture. Under the agreement, Sveda were not permitted to charge the public for entry to the attraction though they were permitted to generate revenue from the attraction through refreshment and souvenir facilities.
Sveda therefore reclaimed the input VAT incurred in the development of the attraction on the basis of its intention to make taxable supplies. This claim for input VAT was largely rejected by the Lithuanian tax authority as it was its view that there was no direct or immediate link between the development costs of the attraction and the projected sales of refreshments and souvenirs.
The AG did not agree with the tax authority’s view and stated that providing “free” access was not sufficient reason to prevent the right to recover the VAT incurred on the development of the attraction. The AG qualified this by stating that the primary use of the attraction did not break the direct and immediate link with other taxable supplies which were related to the attraction. Also of note is that the AG did not consider the receipt of grant funding to support the majority of the development costs as relevant to the determination on the right to recover the VAT incurred on those development costs.
To conclude the AG determined that:
• The fact that no charge is made for the use of a business’ asset is not sufficient to define that assess as not a business asset.
• Where a business asset is used for an underlying business purposes, in this case to attract the public visiting the trail to Sveda’s refreshment and souvenir facilities, then this provides for a business use of the asset.
• Alternatively, where a business asset is put to more than one use and where the secondary use is for a taxable purpose then this should not restrict the right to recover input VAT unless the primary use is either for the purpose of making an exempt supply or where it is used outside of the business.
• Entitlement to full recovery of VAT incurred on the development costs is not determined by the value of the input costs built into the price of subsequent sales.
If the Court’s decision follows suit then there could be some interesting arguments over what is meant by direct and immediate link!
Should you wish to discuss the issues arising from this case or require assistance in considering the decision in relation to your client or own business then please contact Nicholas Ryan at advice@thevatpractice.ie or +353238838181

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