Germany’s new circular regarding the VAT allocation of goods and services to business purposes
When at least 10% of an expense is used for business purposes and at least 10% for non-business purposes, the business can decide to allocate the expense to business or non-business activity. It can be allocated to the business activity to recover input VAT or to the non-business activity, therefore not recover the VAT, but avoid subsequent adjustment relevant to private use.
This (full/partial) allocation must be documented in a timely manner. Under previous law, the tax authorities required notification on the decision by the statutory deadline for filing VAT returns.
The BMF has now clarified that no general, time-bound notification to the tax authorities is required for documenting the allocation decision. It is already sufficient that the tax authorities are informed of objectively recognisable indications that were already present within the deadline, even after the deadline for the VAT return has expired. The way input VAT is recovered is enough to inform the tax authorities. Otherwise, other objectively recognisable indications such as the purchase under a company name, the accounting treatment or a commercial insurance for the item can be considered.
Key takeaway
The circular is based on several rulings and amends the relevant regulations. In practice, the allocation decision and its consequences are of great relevance. The new circular offers simplification, in particular if one has failed to notify the tax authorities of the allocation decision in a timely manner. Nevertheless, the new regulations should only be used as a last resort. For reasons of legal certainty, a proper notification within the deadline still seems advisable.
