Advocate General to Supreme Court rejects VAT recovery in accordance with actual use by bank

December 6, 2021
hoge raad

On December 3, 2021 the Opinion issued by Advocate General (‘AG’) Ettema (20/01521, ECLI:NL:PHR:2021:1054) about an important case concerning the VAT recovery of a bank was published. The bank in question wanted to determine the VAT recovery right on the basis of a financial analysis of the profit and loss (‘P&L’) per product. It believed that this VAT recovery method constitutes an ‘actual use method’, which may be used for determining the VAT recovery right. The AG concluded that it is not possible to apply the actual use method used by the bank.

This case is not only relevant for financial institutions, but also for other taxpayers performing VAT-taxed and VAT-exempt services, such as parties in the public sector, and in education and healthcare.

1. Background and points of law

The taxpayer in this case is a bank that performs both VAT-exempt and VAT-taxed services. All the costs incurred by the bank can be regarded as mixed costs. Most of its turnover consists of VAT-exempt interest income, and commission income of which the majority is subject to VAT. The bank had transferred part of its mortgage receivables to separate securitization companies. The interest the bank received on these receivables was passed on to the aforementioned companies.

The taxpayer prepared a financial analysis of the P&L of each product. To this end, the costs were apportioned to the various product groups by means of three interval-based allocation formulas (based on time registration, actual products purchased and proportional distribution). This resulted in an allocation of the bank’s mixed costs to the various product categories.

In its VAT returns, the taxpayer recovered VAT on its mixed costs in accordance with the turnover-pro rata method without taking account of i) the interest expenses paid, ii) the interest received on its notes in the securitization companies and iii) the interest passed on to the securitization companies. In the appeal proceedings, the taxpayer revised the VAT recovery for the year 2014 and the first three quarters of 2015 by calculating the VAT recovery in accordance with actual use.

The point of law addressed by the AG was whether the Court of Appeals Den Bosch (‘the Court of Appeals’) had set the correct requirements for the actual use method. The Court of Appeals ruled that the VAT recovery calculation on the basis of the P&L per product resulted in a more accurate determination of the VAT recovery than the pro rata on the basis of turnover (‘pro rata’) and is based on (sufficient) objective and accurately determined data.

The AG also briefly addressed the question whether the paid interest expenses should be deducted from the interest income received when calculating the VAT recovery right and whether the interest that was passed on to the securitization companies must be excluded from the taxpayer’s turnover.

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