Input tax deduction – Right to choose classification in the case of mixed-use items
Business owners may deduct, as input tax, the VAT that is legally due for services performed for their enterprises by other business owners. After purchasing a standardised item that is intended to be used both for business purposes as well as privately, a business owner will have the right to choose how it should be classified. They have the option of allocating the item either completely to their enterprise or of leaving the item entirely in their private assets. Moreover, the business owner may also opt to allocate to their enterprise the respective (estimated) share of the use of the item for business purposes. The fiscal administration is of the view that this classification choice is an internal matter of fact that can only be identified through external evidence. If the allocation had thus not been documented for the advance VAT return then it would have had to have been declared, at the very latest, by the deadline for submitting tax returns to the local tax office.
The BFH, in its ruling of 4.5.2022 (case reference: XI R 29/21 (XI R 7/19)), argued against such a time-limited submission of the documentation to the local tax office. Even after the documentation deadline has expired, externally objective points of reference for the allocation may be sent to the local tax office. Generally, the classification decision has to be made when the item is acquired, produced or contributed. Besides claiming or not claiming input tax deduction, other objective points of reference for an express or implied classification to the enterprise that can also be used as evidence are:
- designation of a room as a workroom subject to further objective points of reference,
- acquisition of items under the company name,
- the company providing insurance cover for the item, and
- the accounting treatment.
Please note: In practice, the decision by the BFH could provide a lifeline if the timely allocation turns out to be a matter of dispute. We would nevertheless recommend a timely and clear declaration to the local tax office in order to avoid disputes upfront already.