BENEFIT ACCRUING TO A 3rd PARTY – VAT RECOVERY AVAILABLE?

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Vos Aannemingen’s (“VA”) sole economic activity is the construction and sale of apartment buildings.

It is common practice for a property developer to build apartments on land belonging to third party landowners. The developer would incur advertising, administrative and estate agency fees on selling the apartments. VA incurred such fees in relation to one of its apartment blocks. Full VAT recovery was sought on such costs.

Following an inspection, the Belgian VAT authorities didn’t agree with the position taken. It took the view that such costs also benefited the “exempt” land sales. It decided that VAT recovery should be restricted. The right to deduct VAT should be calculated on the basis of a fraction, with the value of the apartments being the numerator and the value of the apartments plus the value of the land being the denominator.

Initially, VA successfully appealed the decision. However, it subsequently resulted in the case being referred to the CJEC (“the Court”) by the Court of Cassation.

Decision reached

Three questions had been referred to the Court.

On the first, it ruled that that the existence of a direct and immediate link between VA’s costs of selling the apartments and its taxable supplies was not broken simply because the costs might also have had an ancillary benefit for the third-party landowners.

Regarding the additional questions put, it commented that the referring court had to determine whether part of the costs incurred were attributable to the “land” sales. In such a case, the “direct and immediate” link may be partially broken and VAT recovery restricted to the sale of the apartments.  The fact that a proportion of the costs were passed on to the landowners did not in itself have an impact on the recoverability of VAT on such costs. However, it may be a good indicator that full VAT recovery should not be achieved.

An interesting case. It being a good reminder of the earlier decision reached by the House of Lords in the Redrow Group [1999] STC 161 case.

Any business challenged on VAT recovery in similar circumstances should take a read of the decision. Click here to read

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