Opting to tax is not possible for a partly private home office

The Court of Appeal in 's-Hertogenbosch ruled on the letting of a home office to the occupant's own company. The Dutch Tax Administration refused the deduction because the room was not used exclusively for business, and the court agreed.

The facts

Two partners set up a partnership and let a small office in their home to the company of which the husband is the managing shareholder. A lockable office of around 15 m² without sanitary facilities had been built above the garage. The stairs to the office come out in the garage, which is used among other things to store bicycles. Rent of € 363 including VAT is charged each quarter. In one period the partnership reclaimed € 12,313 in VAT. The inspector refused.

The court's ruling

The court holds that the partnership qualifies as a taxable person. Letting immovable property is in principle exempt. Opting for a taxed letting is possible where what is let is not used as a dwelling. According to the court, it was not made plausible that the office was used exclusively for business. One indication was that the VAT return included a private use correction, which implies that the room was also used for non-business purposes.

The court further holds that the Dutch rule excluding the letting of part of a dwelling from a taxed letting is not contrary to the VAT Directive. Nor is there any other supply taxed by operation of law.

The court thereby confirms that the option to tax is construed strictly once part of a dwelling is involved. Only where the part let is not used for residential purposes at all, and is used at least 90% for activities carrying a right to deduct, has the option been validly exercised and does a right to deduct arise.

Why this matters in practice

The chance of validly opting to tax the letting of a non-self-contained room in a dwelling is very small indeed. The room let must not be used as a dwelling at all, and in practice such a room can almost always be put to some private use.

The inspector's argument that there is no taxable person status because there is no participation in a market, as in the Gemeente Borsele judgment, did not succeed. The exclusion of rooms used as a dwelling does, however, provide a basis for refusing the deduction.