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SAC: right to deduct input VAT always to be proved by the taxpayer

In a case involving an entity providing both taxable health services and services exempted from tax without the right to deduct, the Supreme Administrative Court (SAC) dealt with proving the link between the right to deduct and a specific output supply (2 Afs 232/2020-70).The SAC also touched on acquisitions of turnkey tangible fixed assets, departing from the standpoint of the General Financial Directorate (GFD).

The Kolín Hospital mainly provides health services exempt from VAT without the right to deduct, but also some taxable supplies subject to output VAT. The hospital deducted VAT in a reduced amount in relation to individual hospital centres that generated both VAT-exempt and taxable supplies.

The tax administrator rejected the right to deduct for medical supplies, movable property and other operational – technical costs on the grounds that, in their opinion, the hospital failed to prove a direct link between these purchases and specific taxable outputs; meaning that the hospital failed to prove that the costs were not used solely for supplies tax exempt without the right to deduct.

The hospital argued that it was not technically possible to determine, e.g. for a pack of needles, which particular needle was used for VAT-exempt supplies and which one for taxable supplies. In other words, the tax administrator was making it impossible for the hospital to deduct VAT for supplies where it could not be proven to what extent they were used for a specific output supply.

In view of the considerable degree of uncertainty, preliminary questions were formulated to obtain guidance in the matter. However, the SAC considered the questions submitted to be unfounded, and confirmed that in the case in question, the burden of proof as to the right to deduct lies with the taxpayer. 

The judgment also dealt with the acquisition of turnkey fixed assets. According to the GFD’s information on changes to the rules for claiming the right to deduct VAT from 1 April 2011, assets that have been built or created for a taxpayer by another entity where the taxpayer was not involved in their creation (as is the case of a turn-key construction by one supplier) shall not be considered internally produced by the taxpayer. Here, the SAC surprisingly departed from the GFD's view and concluded that acquired turnkey tangible fixed assets may be considered having been internally produced.