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Spain and the right to deduct input VAT on supplies of expenses

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Fernando Matesanz of Spanish VAT Services reports on good news for home workers in Spain after a recent court decision has led to a shake-up of VAT rules.

The Spanish rules governing the right to deduct VAT state that taxable persons may not deduct their input VAT on goods and services when they are not directly and exclusively used for their business or professional activity. It is expressly stated in the Spanish VAT regulations that goods or services which are used simultaneously for business or professional activities and private needs are not deemed to be directly and exclusively assigned to the activity. For example, a property that is used as a dwelling and at the same time as an office would be in this situation.

Accordingly, as a general rule, input VAT on the purchase of goods and services is deductible only to the extent that the goods or services are used exclusively for the taxable person's business or professional activities. A partial deduction of the VAT is not allowed if the goods or services in question are also used partially in the conduct of those activities.

The above has an exception in the Spanish VAT rules. This exemption applies where the input VAT relates to the acquisition of capital goods. In this case, a partial deduction is admissible depending on the degree to which the capital goods are used for the taxable person's business or professional activity. In the case of motor vehicles which are capital goods, an initial presumption of 50% is established, although this degree of use may be different, provided that the taxable person is able to prove it.

The Spanish VAT Law, in a somewhat particular rule, establishes that a partial deduction of input VAT on expenses related to these vehicles (accessories, parts, fuel, parking, repairs, etc.) is also possible. In other words, the Spanish VAT Law provides for the possibility of partial deduction of input VAT on expenditure only when it is linked to a specific capital good, i.e. motor vehicles.

This does not seem to be covered by the VAT Directive, which does not provide for the limitations of the right to deduct in the same terms as the Spanish law maker.

Specifically, Article 168a of the VAT Directive expressly provides for the possibility of deducting input VAT on expenditure relating to immovable property which forms part of the business assets of a taxable person, and which is used by that taxable person both for his business or professional activity and for private or non-business purposes. The deduction of the VAT must be made in proportion to the use of the immovable property for that activity. This possibility is not, however, provided for in the Spanish VAT rules, which limit the partial deduction only to expenditure relating to goods or services connected with motor vehicles in the terms set out above.

Accordingly, a Spanish Administrative Court has stated in a recent decision that the above limitation provided for in the Spanish VAT Law does not fit into the EU VAT regulations. It further stated that partial deduction in proportion to business or professional use must also extend to expenditure on supplies relating to immovable property forming part of the assets of the business and used both for business and private purposes, as provided for in Article 168a of the VAT Directive. The deduction of the VAT on such supplies must be made in proportion to their use for the purposes of the business's activities.

The principle of the primacy of EU Law over national law is well known. This means that the limitations provided for in Spanish legislation should not be considered, and the tax administration is obliged to make a broad interpretation of these limitations to bring Spanish legislation in line with EU legislation.

It is to be expected that this decision will have a significant impact on many taxable persons as a consequence of the increase in remote working. In recent years, the number of home offices has multiplied. All these offices bear expenses for supplies which are subject to VAT. Until today, under a literal interpretation of Spanish VAT Law, these VAT amounts were not deductible. Following the recent decision of the Spanish court, this situation should change, which is undoubtedly good news for all those who work from home.

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