Basic right to choose
When purchasing an item or a building a business owner has the right to choose whether it should be allocated to private assets or to business assets. This right to choose has to be exercised already at the time when the purchase is made. However, for practical reasons, it is also still possible to carry out a timely allocation together with the submission of the annual VAT return. In doing so, according to the case-law of the Federal Fiscal Court (Bundesfinanzhof, BFH), the deadline for submission of the return (31.7 of the subsequent year) should be complied with. If the allocation is not documented vis à vis the local tax office within this time limit, then this authority would assume that the item has not been allocated to the business. As a consequence, the input tax deduction would be definitively refused.
Clarification by the ECJ
In two requests for preliminary rulings, the BFH had directed questions to the ECJ that were related to the decision to allocate to business assets for the purposes of input tax deduction. The aim here was to obtain clarification on whether or not a Member State may provide for a time limit for the allocation to business assets if, upon the expiry of the statutory deadline for filing of annual VAT returns, no allocation decision identifiable by the tax authorities has been submitted. Furthermore, clarification was also sought on the legal consequences that arise if the deadline is missed.
The ECJ, in its ruling of 14.10.2021 (case: C-45/20; case: C-46/20), in principle, did not reject this firm deadline for allocation on any grounds relating to EU law and has now left the decision on the question of the deadline for the documentation of the allocation decision to the BFH.
According to the ECJ, an infringement of the formal requirements should not lead to the of the loss of the right to deduct input tax. Merely missing the documentation deadline should not prevent a business owner from providing reliable evidence of an allocation decision at the time when the purchase was made.
The BFH will now consider if a firm allocation deadline is proportionate in order to achieve the objective of maintaining the principle of legal certainty. Furthermore, it should be noted that the tax administration also has other sanctions against delinquent taxpayers.
Recommendation: The BFH’s decision will thus be highly anticipated. Until then, you should continue to comply with the normal time limit for filing tax returns (usually 31.7 of the subsequent year) for the documentation of the allocation to business assets.