Mixed and partial taxpayers: a refresher on the rules of the game regarding VAT

Pieter Van Hauwaert   |  

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Pieter Van Hauwaert

Pieter is a VAT specialist and is part of the Tax & Legal team at BOFIDI

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As previously communicated, a new procedure has been introduced, with effect from 1 January 2023, for mixed taxpayers who opt for VAT deduction according to ‘actual use’.

From the aforementioned date, these mixed taxpayers must submit prior notification electronically to inform the VAT administration of their choice. They must also provide certain information regarding this choice, and important formalities and deadlines apply.

However, we notice that once again the new procedure raises many questions about the correct rules concerning VAT deduction by mixed (and partial) taxpayers. We therefore list them again.

Mixed taxpayers – VAT deduction

Mixed taxpayers are taxpayers who carry out both taxable and exempt transactions (i.e. transactions that benefit from one of the VAT exemptions listed in Article 44 of the Belgian VAT Code).

Since VAT exempt transactions do not allow for the deduction of input VAT, mixed taxpayers logically only enjoy a limited right to VAT deduction. There are 2 methods they can use to determine it.

General pro rata-based method

Mixed taxpayers are ‘by default’ subject to the general pro rata deduction method. Under this method, they apply a deduction limit in proportion to a fraction, with the numerator being the turnover from the VAT-taxable transactions and the denominator being the total turnover (both taxable and exempt transactions).

For example, a company active in real estate rental rents out lock-up garages, without any associated housing, to private individuals (taxable); it also rents out housing, with or without a lock-up garage, to private individuals (VAT-exempt). The turnover (excl. VAT) from the rental of lock-up garages is 20,000 EUR and the turnover from the rental of homes is 80,000 EUR.

The general pro rata figure is therefore 20% (20,000 EUR / 100,000 EUR).

This deduction percentage is then applied to all invoices for the purchase of goods and services.

Actual use

Alternatively, mixed taxpayers can choose to apply the ‘actual use’ deduction method.

This method basically assumes the existence of clearly distinguished ‘sectors of activity’ and the possibility of allocating costs to those different sectors.

VAT deduction according to actual use is applied as follows:

  • VAT on purchases attributable solely to taxable outgoing transactions: 100% deduction
  • VAT on purchases attributable solely to VAT-exempt outgoing transactions: 0% deduction
  • VAT on purchases attributable to both taxable and tax-exempt transactions (“mixed costs, e.g. the cost of accountants, general expenses, etc.): deduction according to a special pro rata figure. The special pro rata figure can be calculated in various ways as long as it results in a ‘correct’ VAT deduction.

This method results in a completely different VAT deduction than the one calculated according to the general pro rata figure. Let’s take the example above again. Under the ‘actual use’ method the company would be allowed to deduct 100% of the VAT on purchases relating solely to the lock-up garages (e.g. repairs, improvement work, etc.). On the other hand, it would not be allowed to deduct VAT on purchases relating solely to housing rented out with associated garages. For purchases relating to both activities, a special pro rata figure will have to be applied (e.g. on the basis of the turnover, although another criterion can also be used).

Companies should themselves assess their VAT position as correctly as possible in order to determine which deduction method is most advantageous, but also which method will lead to the most ‘correct’ VAT deduction.

In fact the VAT administration is entitled to impose the ‘actual use’ method, if this is the only method that would result in a ‘correct’ VAT deduction in specific situations (viz. in situations in which the general pro rata figure would result in a distortion of the VAT levy). This has to be assessed situation by situation.

Exception: non-specific economic activity

There is an important exception rule, aimed at preventing taxpayers from becoming mixed VAT taxpayers for ‘additional’ and exempt transactions of a real estate or financial nature.

If companies carry out this type of ‘additional’ transaction – e.g. in the context of managing their assets – they will still not qualify as mixed taxpayers under the exception rule. They will continue to be considered as ordinary taxpayers with full rights to VAT deduction. But obviously they are not entitled to deduct VAT on costs that are directly related to the ‘additional’ exempt transactions.

However, the above exception rule does not apply if the real estate or financial transactions constitute a ‘specific’ economic activity of the company concerned. Examples of such companies are real estate offices, banks, credit institutions, etc. They will always be subject to the rules on mixed VAT liability.

Partial taxpayers: almost the same but not quite

Partial taxpayers are taxpayers who conduct transactions both within the scope of VAT and outside the scope of VAT.

Typical examples are:

  • Public bodies that carry out commercial transactions within the scope of VAT in addition to their administrative work;
  • Companies (research bureaus) that carry out both taxable transactions and public interest research for which they receive operating grants.

Unlike the regulations for mixed taxpayers, there are no specific legal rules on VAT deduction for partial taxpayers.

In principle partial taxpayers are only entitled to deduct VAT to the extent that purchases are intended to be used for taxable transactions (in line with actual use). They should investigate very thoroughly the extent to which they are entitled to deduct VAT and how they can exercise this right.

Our Bofidi experts will be pleased to help you

Do you still have specific questions on this subject? Then please do not hesitate to contact us. Bofidi’s expert team will be happy to help you.

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