VAT Deductible on Residential Premises

Two recent VAT cases that reached the European Court of Justice (ECJ) have given food for thought for VAT-registered traders who work from home, or who maintain an office at home.

In the first case, a married couple in Germany owned a house jointly, one room of which the husband used for his business, which was VAT registered.
When the house was built, VAT was charged and the husband reclaimed (under the rules in article 17 of the 6th Directive) 12.5 per cent of the input VAT, as that was the proportion of the total area of the house used for his business.

Payment of the claim was opposed on the basis that the supply was not made to the registered trader (the husband) alone as the house was owned by the husband and wife. The Court allowed the claim, on the basis that the couple was not a separate legal entity from the husband and wife themselves, so the husband was entitled to deduct input tax up to the proportion of his co-ownership of the house. The fact that the invoices in question were made out to both the husband and wife did not preclude a claim.

In the second case, a Dutch national contested the law in that country which prevents a 100 per cent deduction of VAT in circumstances such as the above. The claimants used a bungalow 7/8ths of the time for letting (an economic activity) and 1/8th of the time for their own occupation. They reclaimed 7/8ths of the VAT on the cost of the property. They subsequently decided to treat their own occupation as a taxable supply and submitted a further claim for the balance of the input tax they had paid; in effect allocating the whole of the bungalow to ‘business capital’. The case was referred by the Dutch authorities to the ECJ, which found that the VAT was reclaimable, the prohibition in Dutch law being invalid due to the primacy of European law.