Deduction of input VAT: to be accounted for in the correct VAT return

16 November 2010 Add expertise tag Add service tag Add country tag

Dutch invoicing regulations – which are based on EU Directives – prescribe that invoices should be issued by ultimately the fifteenth day following the month in which the goods or services were supplied and should be accounted for in the VAT return over said period. The same mutatis mutandis applies to VAT incurred.

This implies that VAT can only be deducted in the taxable period in which it became due (VAT returns need to be filed either monthly, quarterly or annually depending on the type of business and the level of turnover).

The latter has recently been confirmed by The Dutch Supreme Court stating that the provisions for adjusting deducted VAT at the end of the fiscal year cannot be used to deduct previously unclaimed VAT from previous taxable periods.

The ruling from the Dutch Supreme Court

In the case at hand, a Dutch entrepreneur incurred VAT in the first part of the year which was initially not deducted. Instead, the entrepreneur decided the defer the deduction and accounted for it in the last VAT return of that specific financial year. In view of the entrepreneur this was defensible. The entrepreneur argued that – according to his interpretation - the relevant Dutch VAT rules and regulations state that: “in the VAT return for the last taxable period of the financial year, adjustments to the VAT position can be made based on the information applicable to the entire year (so called: “Recalculation provision”). This standpoint was rejected by the tax inspector. The Dutch Supreme Court ruled that this provision is not applicable in the case at hand but only applies to situations whereby based on the information applicable to the entire year, the initial deduction has to be adjusted. This provision instead can not be used to deduct VAT incurred over previous periods which have not been deducted in that specific period. The High Court of Justice herewith confirmed its earlier decision: VAT can only be deducted in the appropriate taxable period and not in later tax returns. In order to reclaim VAT incurred in an earlier period, the tax payer has basically two formal options left:

  1. filing an objection against the VAT return of that respective period within six weeks after filing of that return, or
  2. filing of an ex officio VAT return at a later stage over that respective period (the tax authorities normally allow such an approach and generally pay out the refund. The disadvantage is that in the situation the request for refund is rejected by the tax authorities, it is not possible to file for an appeal).

The ruling from the Dutch Supreme Court is typically relevant for entrepreneurs that are not entitled to a full recovery of input VAT, for example in situations whereby entrepreneurs are engaged in both taxable and exempt supplies of goods and services. In practise they seemed to choose deducting (greater part of) the VAT incurred in the last VAT return of the financial year as they then had a clear picture of their (pro-rata) entitlement to VAT relief. This is thus no longer possible according to this ruling. In order to be entitled to VAT relief , the VAT (either payable or refundable) needs to be accounted for in the VAT return over that specific period.