This case concerns whether a notary’s receipt of interest on a quality account impacts their right to deduct input VAT on general costs. The tax inspector argues that the notary should not have a full right to deduct input VAT because the activities related to the quality account are VAT-exempt. The notary, however, claims that they can deduct all input VAT on their general costs.
- Quality Account: A notary is legally required to hold a special account, known as a quality account, for funds received in connection with their work for third parties. Any interest earned on this account is added to the balance.
- VAT and Input Tax: Businesses that are subject to VAT can usually deduct the VAT they pay on goods and services (input VAT) from the VAT they collect on their own sales. However, this deduction is not always possible if the business engages in VAT-exempt activities.
- The Dispute: The tax inspector argues that the notary’s receipt of interest on the quality account constitutes a VAT-exempt activity, which reduces their right to deduct input VAT. The notary argues that the interest should not affect their input VAT deduction.
- The Inspector’s Argument: The tax inspector argues that the interest the notary receives is a payment for providing credit, meaning that the notary must apply a pro rata deduction, where the interest is treated as income from exempt activities.
- Lower Court Rulings: Both the District Court and the Court of Appeal ruled in favour of the tax inspector. They considered the interest income as consideration for a VAT-exempt service, which should be included when calculating the pro rata deduction for input VAT. The courts determined that maintaining the quality account is a direct, continuous, and necessary extension of the notary’s taxable activities.
- The Notary’s Arguments: The notary’s arguments against the lower court’s decisions include:
- The interest income is not a payment for a service performed for the bank.
- The notary only performs one activity, which is the operation of a notary’s office, and receiving interest is not an extension of this activity.
- The services are performed for the clients, not for the bank.
- The notary should be entitled to full input VAT deduction as the goods and services they receive are used for their notarial services, not for financial services to the bank.
- Burden of Proof: The Advocate General concludes that the notary bears the burden of proof to show that they are entitled to a full deduction of input VAT. This is because the notary wants to deduct all input tax on general costs and the tax inspector has challenged this. The Advocate General determines that the notary must show they are not performing a service for consideration relating to the quality account, and that their actions are in line with their economic activity.
- Performance for Consideration: The Advocate General states that a service is performed for consideration if there is a direct link between the service and the payment received and the payment is the actual consideration for the service. The Advocate General considers that the notary performs a service as a legal agent for the beneficiaries of the funds, but does not perform this service for consideration.
- The Advocate General’s Conclusion: The Advocate General finds that the notary does not provide a service to the bank and should be able to deduct their full input VAT. They conclude that even if it is considered that the notary is performing a service for consideration, they are not performing this service for the bank. Further, the Advocate General finds that this service as a legal agent for the beneficiaries is not performed for consideration. The Advocate General recommends that the Supreme Court refers the case for further factual investigation.
- The ‘Extension’ Argument: The Advocate General states that the lower court did not err in determining that the maintenance of the quality account is a direct, ongoing, and necessary extension of the notarial services of the notary.
- Commissionaire Fiction: The Advocate General considers the commissionaire fiction, where if a taxable person acts in their own name, but on behalf of someone else, they are considered to have received and performed the service themselves. The Advocate General questions whether the notary performs a service for the bank on behalf of the beneficiaries. They conclude that the notary does not act as an intermediary in the provision of credit or other financial services to the bank and therefore does not satisfy the requirements of this fiction.
- Short-term Transactions: In 2013 a new regulation came into force, allowing the notary to keep interest earned on funds held for no more than 5 working days. The Advocate General questions whether this means the notary is providing a service for consideration, but considers that the level of payment is not related to the services of the notary, who is legally required to perform these duties regardless of the level of interest earned.
- The Advocate General’s Recommendation: The Advocate General recommends the Supreme Court to rule in favour of the notary and refer the case back to the lower court for factual investigation.
In summary, the core issue is whether the interest earned by the notary on the quality account should be considered a payment for a service, and if so, whether that service is VAT-exempt which would restrict the notary’s right to deduct input VAT. The Advocate General believes the notary is not providing a service for consideration and is therefore entitled to full input tax deduction.
Source: uitspraken.rechtspraak.nl
Note that this post was (partially) written with the help of AI. It is always useful to review the original source material, and where needed to obtain (local) advice from a specialist.
