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The Economic-Administrative Court has accepted that input VAT incurred before the start of an activity can be deductible even if the company does not make any sales.
Preparatory" VAT
Intention. Input VAT incurred on the purchase of goods or services during the "preparatory phase" of a business (i.e. prior to the start of the activity) is deductible. Note. For this purpose it is sufficient to prove that by incurring such expenses it was the intention to start an activity which gives the right to deduct input VAT.
Evidence. In these cases, the Inland Revenue accepts the following evidence to prove this intention:

  • Formalities. That the necessary authorisations and licences have been applied for.
  • Goods and services. That, by their nature, the goods and services acquired were related to the activity to be carried out.
  • Census declaration. A "pre-commencement of operations" census declaration must have been submitted prior to incurring the expenses.
  • Reasonable time. Finally, the time elapsed between the acquisition of the goods and services and the start of the activity was reasonable (depending on the type of activity).

What if it does not start?

Developer. This was the case of a businessman who intended to start a development activity, and who carried out "preparatory steps" for which he deducted the input VAT (including acquiring the option to purchase some plots of land), but after a few years he rescinded the option to purchase, without actually making a sale. After a few years, however, he rescinded the purchase option, without ever making a sale. Attention! In view of this, the VAT Inspectorate considered that, as no sales had been made, there had never been any intention to carry out an activity, and obliged him to refund the VAT deducted.

TEAC. Well, this businessman appealed to the Economic-Administrative Court (TEAC), and the latter upheld him with these arguments:

  • Whether input VAT on 'preparatory expenses' is deductible depends solely on the circumstances at the time when the expenses were incurred.
  • Thus, if on the basis of the other evidence provided it can be shown that the intention of the entrepreneur was to start an activity, the input VAT should be considered deductible, even if the activity is never started.

Comment
Intention. In practice, the determining factor is the intention to use the assets or expenses for the activity to be started. Attention! And the tax authorities could be restrictive when, although the activity has been started, the assets were acquired too far in advance and were susceptible to private use. See two examples:

  • A property is purchased with VAT to be used as an office, but the activity does not start for some time. Attention! In this case, the tax authorities may "suspect" that the initial intention was to use the property for your own use, and refuse to deduct the VAT. To avoid this, immediately carry out the necessary works to adapt the property to the activity, and avoid occupying it in the meantime.
  • The same applies to vehicles, if they are used for private purposes for a period of time. As soon as the vehicle is purchased, the company logo should be clearly visible on it.

If, according to the other evidence provided, it can be shown that the entrepreneur's intention was to start an activity, the tax authorities must accept the input VAT deduction, even if the activity is never started.
Note: This is TEAC ruling 27-4-15, EDJ 58976.