New formalities related to the real use method for input VAT deduction
On 1 January 2023, the formalities for the application of the real use method by mixed VAT-taxable persons have been amended. The Belgian VAT authorities have essentially imposed more responsibilities on the VAT-taxable person.
What is a mixed VAT-taxable person/real use method?
A mixed VAT-taxable person is a VAT-taxable person who carries out both activities that are subject to VAT and activities that are exempt from VAT on the basis of article 44 of the Belgian VAT Code. As a consequence, such a mixed VAT-taxable person has the right to only partly deduct VAT that it incurs on its incoming invoices, being the VAT incurred to perform its activities which are subject to VAT. There is no right to deduct the VAT incurred to carry out the -according to article 44 of the Belgian VAT Code- VAT-exempt activities. A mixed VAT-taxable person has two ways to determine its right of VAT deduction, either applying the general pro rata or the real use method.
As a reminder, the real use method implies that the VAT on costs that are exclusively linked to the VAT-taxable activities can be fully deducted while VAT on costs exclusively related to the VAT-exempt activities is not deductible. For mixed (overhead) costs a special pro rata needs to be determined (e.g. on the basis of the turnover, the number of personnel attributed to the various activities, etc.).
What are the changes in the formalities to be fulfilled to apply the real use method?
Until 31 December 2022, the application of the real use method required the upfront-approval from the Belgian VAT authorities. Once this approval was obtained -although in practice rarely a written approval was provided-, the VAT authorities could in principle not challenge the real use method in the hands of the respective VAT-taxable person unless there was a change in their activities.
As from 1 January 2023, this pre-approval has been replaced with a prior notification by the mixed VAT-taxable person itself. The prior notification is twofold:
Communicating the application of the real use method via form e-604A for new VAT-taxable persons, or via form e-604B for existing VAT-taxable persons; and
Providing detailed information regarding the percentages of VAT incurred in relation to the VAT-taxable and VAT-exempt activities, as well as on the special pro rata determined for the overhead costs. This should in principle be done via Intervat (https://finances.belgium.be/fr/E-services/Intervat).
What are the due dates for the prior notification?
The new prior notification should be done before the end of the first reporting period. The foregoing means that VAT-taxable persons submitting monthly VAT returns had to perform the prior notification before 31 January, while VAT-taxable persons submitting quarterly VAT returns had to perform the notification before 31 March.
Also mixed VAT-taxable persons already applying the real use method before 1 January 2023 have to perform this prior notification. However, as a transition measure, this should be done no later than 30 June 2023. For those ones that did not yet notify it is important to act now.
As regards the information that must be communicated in the periodic Belgian VAT return via Intervat, a tolerance has been foreseen for calendar year 2023. More specifically:
For VAT-taxable persons already applying the real use method on 31 December 2022, the required information must be provided in the periodic VAT return for the first quarter of 2024 or the month of May 2024 at the latest; and
For VAT-taxable persons that want to start applying the real use method in the course of 2023, the required information should be provided in the periodic VAT return for the first quarter of 2024, or the VAT return of one of the first three months of 2024.
What happens when the prior notification is (not timely) done?
If the prior notification is timely carried out, the VAT authorities will send a confirmation receipt. However, the VAT authorities have the right to refuse the request or to change the proposed VAT deduction method with retrospective effect up until 31 December following the year in which the initial notification took effect.
For example, when a mixed VAT-taxable person has send the prior notification to apply the real use method as from 1 January 2023, the VAT authorities have the right to refuse the request until 31 December 2024.
Once a VAT-taxable person starts applying the real use method, the VAT-taxable person will only be able to stop applying this method as of 31 December of the third year following the date on which the prior notification took effect. This change accordingly takes effect on 1 January of the next year.
For example, when a mixed VAT-taxable person has send the prior notification to apply the real use method as from 1 January 2023, this VAT-taxable person must continue to apply the real use method (at least) until the end of calendar year 2026 assuming that the VAT authorities have not refused its request (and obviously if it remains a mixed VAT taxable person until then).
If the VAT-taxable person wants to switch to the general pro rata as of calendar year 2027, the VAT-taxable person must send a notification before 1 January 2027 to the Belgian VAT authorities.
If the prior notification is not, or not timely, done, the mixed VAT-taxable person loses the right to apply the real use method for the respective calendar year. A retrospective application is de facto excluded.
It may also occur that the VAT authorities themselves impose the application of the real use method. This decision will in principle apply to future VAT returns but can have nevertheless important retrospective effects in case the VAT authorities consider that mistakes were made in the past in relation to your VAT deduction.
Why does it matter?
Apart from the new formalities imposed on the respective VAT-taxable persons, it is highly advisable to perform a check on your current VAT position. The VAT authorities have indicated that they will be more actively verifying whether or not the chosen VAT deduction method corresponds to the fiscal reality of the business, possibly leading to retrospective corrections and the obligation to use a different regime going forward.