Notary firm's VAT deduction limited by interest on its client account

The District Court of Noord-Holland held that positive interest on a client account restricts deduction. In our view there are good arguments for challenging that ruling.

A Dutch notary is required to hold a client account in their own name at a bank. That account is used exclusively for money the notary holds in connection with their work. The notary has power to manage and dispose of the account, but the money belongs not to them but to the persons entitled to it.

Any positive interest therefore in principle accrues to those persons. On short transactions, however, the notary need not pay over interest where the money has been in the account for no more than five working days. Where interest rates are positive, which these days is no longer a given, the notary can receive interest income they may keep. No VAT is due on that income.

The District Court of Noord-Holland

A recent ruling addressed whether that interest income restricts the right to deduct.

The case concerned a notary firm with a large commercial property practice that earned more than € 100,000 in positive interest each year between 2011 and 2013. Its regular turnover subject to VAT was over € 1.4 million in 2011 and over € 1.3 million in 2012 and 2013. The firm deducted the VAT on its costs in full.

The tax authorities considered that wrong, because the firm also made untaxed supplies, namely placing capital on deposit for interest, so that VAT on general costs was only deductible pro rata. They corrected the deduction by way of an assessment and imposed a penalty of 10%. The court found for the tax authorities and held that the deduction position taken was not arguable.

What this means

Notary firms that have earned positive interest since 2017 and deducted VAT in full face a risk of assessments and penalties.

Where that interest income exceeds 10% of turnover in a year, there is also a risk that the tax authorities take the position that the option to tax was wrongly exercised on the purchase or lease of premises, potentially exposing the firm to a claim from the seller or landlord for adjustment losses. The option requires the property to be used at least 90% for taxable supplies.

Even so, in our view there are good arguments for challenging both the authorities' position and the ruling. The Court of Justice case law the court relied on differs in relevant respects from the situation of a notary's client account. Arguments that matter to whether the deduction position is arguable were also not raised in these proceedings. That arguability counts, because where a position is arguable the tax authorities may not impose a penalty.