VAT treatment of a mixed-use property renovation
Immo Renov bv purchases and renovates an old building in Belgium for €1,500,000 plus 21% VAT (€315,000). The ground floor will be let to a bakery as commercial space; the upper floors will be converted into two apartments let as private residences. The commercial space represents about 40% of the surface and the apartments 60%. The company registers for VAT and intends to deduct the VAT on the renovation. The lease of the apartments will be exempt from VAT as a private residence. The company has no other exempt activities and asks whether it can deduct all the input VAT. The VAT authorities have not yet ruled on the apportionment method.
1. Determine the deductible portion of the input VAT and explain the apportionment method you would apply.
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Input VAT is deductible only to the extent the goods and services are used for taxable activities. The commercial lease to the bakery is a taxable activity if the company has opted for VAT on the commercial lease; the residential leases are exempt. The VAT must therefore be split.
A surface-based apportionment (40% commercial, 60% residential) is a reasonable starting point, but the correct method should reflect actual use. If the commercial space is 40% of the surface but represents a different share of the investment cost, a cost-based or turnover-based method may be more accurate. Under Belgian practice, a mixed-use building can be split by surface or by actual use, and the method must be consistent and justifiable.
Deductible VAT = €315,000 × 40% = €126,000, if the surface method is accepted and the commercial lease is taxable. The remaining €189,000 is not deductible. If the company has not opted for VAT on the commercial lease, the commercial part is also exempt and no VAT is deductible at all. The company should also consider the VAT adjustment (herziening) rules over the following years if the use changes.
2. The company later decides to let the commercial space to a doctor's practice, which is also exempt. What are the consequences, and what should the company do?
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If the commercial space is let to an exempt activity (a doctor's practice), the use of that part changes from taxable to exempt. The company must apply the VAT adjustment rules. For immovable property, the adjustment period is generally 15 years, and the adjustment is calculated on one-fifteenth of the initial deduction for each year of changed use.
Initial deduction on the commercial part was €126,000. If the change occurs in year 3, the adjustment is €126,000 / 15 = €8,400 per year for the remaining years. The company must repay the adjustment for the years affected. The exact amount depends on the year of the change and the remaining adjustment period.
The company should also review whether it can opt for VAT on the lease to the doctor; if the doctor's activity is exempt, the option may not be available. It should document the change, notify the VAT authorities where required, and adjust its VAT returns. Going forward, no further deduction is available for that part, and the company should consider whether the investment still meets its financial assumptions.