On 23 April 2015 the European Court of Justice (ECJ) ruled on a question relating to the VAT taxable amount where part of the purchase price of a building relates to interest on borrowed capital. The relevant legislation applicable in this case was in the VAT Directive 77/388/EEC.

Reference was made to the ECJ on 16 January 2014 by the Hof van Beroep te Gent in the case of Property Development Company NV v Belgische Staat. The ECJ was requested to give a preliminary ruling on whether interest on borrowed capital, that under the relevant Directive may be included in production costs where it relates to the period of production, is part of the taxable amount under Art. 5(6) of the Sixth VAT Directive 77/388/EEC, being part of the cost price within the meaning of Art 11A(1) of Directive 77/388/EEC or the incidental expenses under Art 11A(2).

Relevant provisions of the VAT Directive

Under Art. 5(6) of Directive 77/388/EEC the disposal of goods generally for uses apart from those of the business, where VAT on the goods or components was wholly or partly deductible, are treated as supplies made for consideration. Under Art. 5 (7) (b) of the Directive member states may treat as supplies made for consideration the application of goods by a taxable person for the purposes of a non-taxable transaction, where the value added tax on such goods became wholly or partly deductible upon their acquisition or when they were produced, constructed, purchased etc in the course a business.

Art 11A(1) of Directive 77/388/EEC provides that the taxable amount is the consideration obtained by the supplier from the purchase, customer or a third party for the supplies, including subsidies. This is often the purchase price, or in some cases the cost price, the full cost to the person providing the services, or the open market value of the services supplied.

Under Art 11A(2) the taxable amount includes taxes, duties, levies and charges, excluding the value added tax itself; incidental expenses such as commission, packing, transport and insurance costs charged by the supplier to the purchaser or customer. Expenses covered by a separate agreement may be considered to be incidental expenses by the member states.

ECJ preliminary ruling

The ECJ ruled that Art.11A of the Directive must be interpreted to mean that in this case the taxable amount for calculating VAT on an application within Art 5 (7) (b) that a taxable person has constructed is to be the purchase price of buildings whose location, size and other essential characteristics are similar to those of the building in question. It is irrelevant whether part of the purchase price relates to interest on borrowed capital.