This was a German case, which went to the European Court of Justice (the “ECJ”). The principles stated, however, apply across the EU—except possibly for Austria, which appears to exclude the right to deduct input tax in the case of a home office. (See paragraph 50 of the ECJ decision.)
Besides his employment, Mr HE was also a self-employed specialist writer. He and his wife bought a plot of land: he owned ¼ of the land; his wife owned the remaining ¾. They then had a house built on the land, which they owned in the same proportions. The invoices for the building work were addressed to “Mr and Mrs HE”.
When engaged in his activity as a self-employed specialist writer, Mr HE used a room in the family house. Since the room represented 12% of the total surface area of the house, Mr HE reclaimed a total of 12% of the VAT paid on the construction of the house itself.
The relevant German tax office contended that since the invoices were addressed to Mr and Mrs HE (not Mr HE alone), Mr HE could not reclaim any of the input tax. On appeal, however, the tax tribunal held that the invoices were acceptable but that, since Mr HE only owned ¼ of the house, he could only reclaim ¼ of the 12% of the input tax attributable to the room—i.e. 3% of the VAT charged on the construction of the house.
Both sides appealed against this decision of the tax tribunal. The appeal court referred the case to the ECJ.
As regards the proportion of VAT that Mr HE could deduct, the ECJ held that this could not be decided on the basis of the domestic law of a Member State. Provisions of the Sixth VAT Directive must normally be given an autonomous and uniform interpretation throughout the EU. Mr HE was entitled to reclaim the whole 12% for the following reasons:
- He used the home office personally and wholly for the purposes of his business, and had decided to allocate the room entirely to his business. He therefore in fact disposed of the room as owner.
- The VAT deduction system was meant to relieve a trader (taxable person) entirely of the burden of VAT payable or paid in the course of all his economic activities.
It did not matter which of the co-owners in fact settled the invoices relating to the construction of the building. A third party may provide consideration for a supply.
The amount deducted cannot, however, exceed the limits of the taxable person’s interest in the co-ownership of the item. For example, since Mr HE owned ¼ of the property, he could not have recovered more than ¼ of the VAT charged on the construction of the house—if the area used for business purposes had been greater than that.
[The UK position: In the UK spouses usually own property as joint tenants, as opposed to tenants in common. Tenancy in common seems to be more akin to the basis on which Mr and Mrs HE owned their house: each tenant in common has a separate share, which he or she can deal with separately. It may be that, in the context of a joint tenancy, this type of limit on VAT recovery would not apply. I do not, however, express a firm opinion on that point!]
As regards the invoices, the ECJ held that invoices issued to the co-owning spouses, without distinguishing between them and with no reference to the proportions in which they held the property, were sufficient. The reasons for this probably justify a separate blog entry.
Case C-25/03, Finanzamt Bergisch Gladbach v HE.
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