Allocation decision for input VAT deduction - BMF circular letter dated 17 May 2024

Starting point: BFH submissions to the ECJ

In 2021, the ECJ ruled on two cases following a referral from the BFH (as reported here) in which taxable persons had claimed input VAT for capital goods for the first time by submitting annual VAT returns too late; these cases concerned a photovoltaic system and a home office.

The tax office had argued that the decision to allocate these assets to the business sphere had not been communicated to the tax office in good time and that the input VAT deduction was therefore inadmissible.

The ECJ had ruled that the allocation decision did not have to be expressly stated but could also result from the circumstances. The fact that the claimants did not claim the input VAT deduction for the capital goods in due time does not, in itself, allow the conclusion that they had not allocated these goods to the business sphere. Although the allocation decision itself is a substantive requirement, notifying the tax office is only a formal requirement for the input VAT deduction. If formal conditions are not met, this may only lead to the loss of the input VAT deduction if this prevents the substantive conditions from being proven with certainty. It was not apparent to the ECJ that this applied to exceeding the statutory tax return deadline, but a deadline is not generally inadmissible.

The BFH followed the ECJ in its subsequent decisions and ruled that the allocation decision must be made when the supply is received. A documentation period runs until the statutory tax return submission deadline expires. If there are objectively recognisable indications of an allocation within the documentation period, these can also be communicated to the tax office after this period has expired.

BMF provisions

The Federal Ministry of Finance is implementing this case law and amending the administrative guidelines to the German VAT Code accordingly. In detail, the following applies to the allocation option for a uniform asset used at least 10% for business purposes:

1. Allocation

• The wording "allocation to the company" used in Germany is synonymous with "acting as a taxable person" (this is the term used by the ECJ).
• The allocation can also be implied (implicit).
• If there is no evidence of allocation to the business sphere, this cannot be assumed. In individual cases, only a pro rata allocation may be assumed.
• A decision made outside the documentation period to use a higher proportion for business purposes does not have a retroactive effect and does not lead to a higher input tax deduction.

2. Documentation and documentation deadline

• The allocation decision must be made when the supply is received and must be documented as a fact internally (i.e. the tax office cannot read the taxpayer's mind).
• The documentation deadline ends with the expiry of the regular annual VAT return deadline; individual deadline extensions are irrelevant.
• As a rule, documentation is provided by claiming the input VAT deduction.  If this does not allow conclusions to be drawn about the allocation itself or its scope, other externally recognisable evidence must be used. If these are available within the documentation deadline, they can be communicated to the tax office even after the deadline has expired. 
• The failure to deduct input VAT is a strong indication against the allocation to the business but does not, in itself, allow the conclusion that the taxable person has not allocated the asset to the business sphere. The preliminary VAT return can be corrected with regard to the input VAT deduction until the documentation deadline has expired.
• The BMF then gives some examples of objectively recognisable signs of evidence. Witness evidence and/or party testimony are not accepted. 

The principles of this BMF letter are to be applied in all open cases.

Practical implications

As a result of this change, the standard notification of the allocation of an asset to the business sphere is no longer necessary. However, be aware that this only applies if there is sufficient evidence to support the allocation decision before the annual VAT return deadline. It is possible to argue with the tax office at a later date about whether or not this evidence is sufficient. If the evidence is not deemed sufficient, the tax office must be notified within the required time period. If this is not done, there is no right to deduct input VAT.  It is therefore advisable to document the allocation very carefully and to claim the input VAT deduction before the deadline to avoid any disputes, whereby preliminary VAT returns can also be corrected. However, where this has been inadvertently omitted, the new regulation offers opportunities to claim the input VAT deduction retrospectively if the necessary evidence was available before the deadline.

Autorin

Nadia Schulte
Tel.: +49 211 83 99 330