Proportional VAT deduction

What it means

Where a payer uses a purchase both for supplies that carry the right to deduct and for exempt supplies that do not, input VAT is not deducted in full but in proportion. That proportion is set by the annual coefficient.

The second case is an asset used partly for business and partly outside it, typically a car or a building. There the split is not the coefficient but the actual extent of business use, which the payer has to be able to prove.

The proportion applies only to purchases of mixed use. What serves taxable supplies alone gets full VAT deduction, what serves exempt supplies alone gets none; the coefficient is applied only to the rest, typically overheads, energy, office equipment or accounting services.

How it works in practice

With the coefficient the deduction runs provisionally on the previous year’s figures, and in the last tax period of the calendar year the difference is settled in one line of the return. With an asset used privately as well, the share is set in advance instead and has to be backed by something: a mileage log, floor area, meter readings.

For capital goods a change of use is tracked in later years too: twenty years for immovable property and five for the rest. That is when the adjustment of deducted VAT applies.

As each purchase invoice is booked we mark which group it falls into: full deduction, none, or proportional. Without that sorting the coefficient cannot be settled correctly at year end, and the VAT return would show different amounts from those in the books.

What to watch out for

A company renting out a flat exempt alongside its main business deducts all the VAT on overheads. At audit those overheads are recalculated by the coefficient for every open year, and a penalty and default interest come on top of the VAT paid back.

Errors also creep into calculating the coefficient itself. The sale of fixed assets the company used in its business, for example, is left out of the ratio; count a one-off sale of a building and the coefficient for the whole year comes out distorted, and the deduction with it.