Fact of the caseThe company before the court was engaged in both VAT taxable business activities through the sale and leasing of cars and non-taxable activities comprised of insurance and financing (i.e., mixed activities). The company deducted input VAT based on the turnover of the activities on the grounds that the turnover-based allocation method constitutes the primary method according to the EU VAT Directive and Sweden has not incorporated any of the optional distribution methods for member states to adopt as specified by the directive.
The Swedish Tax Agency disallowed the deduction, taking the position that the proportion of deductible VAT should be calculated using a “sectorised” distribution method based on each sector's share of the total number of concluded agreements and financed amounts because that method would more accurately reflect the resource consumption in the company's operations, and asserting that the Swedish rules are consistent with the VAT Directive.
Decision of the Supreme Administrative CourtThe HFD granted the company the right to apply a turnover-based distribution method. Underlying the court’s decision is an acknowledgment that Sweden cannot be considered to have adequately, clearly and precisely incorporated the articles of the VAT Directive concerning the deductibility of input VAT in mixed activities cases, neither with respect to the main rule of a turnover-based calculation method nor any of the voluntary exception measures that member states are entitled to introduce for certain transactions.
According to the court, under Swedish VAT legislation, deductible input VAT for purchases involving mixed activities should be allowed for the portion of the acquisition made for taxable activities. If this portion cannot be determined, a reasonable allocation should be made. Thus, Swedish law does not explicitly prescribe the use of a turnover-based distribution method as the primary rule, nor does it specify for which transactions an alternative method may or should be employed. The court stated that through this rule, Sweden has not correctly incorporated the VAT Directive, and taxpayers can instead rely directly on the provisions of the directive for calculating deductible input VAT based on the principle of the direct effect of EU law. The HFD firmly establishes that a taxpayer always has the option to use the turnover-based method outlined in the VAT Directive for calculating the proportion of deductible input VAT.
This is a highly anticipated and clarifying decision regarding the treatment of input VAT on shared costs involving mixed activities. The HFD ruled that the provisions of the VAT Directive regarding the calculation of the deductible portion in mixed activities have not been incorporated correctly into Swedish VAT law. Although the case pertains to periods covered by the old VAT law, it is likely applicable to the corresponding provision in the new VAT law that applies as from 1 July 2023, as the wording of the provision remains the same.
As noted above, the court’s decision indicates that a taxpayer can always determine the deductible portion of input VAT based on turnover as the distribution basis by invoking the direct effect of the provisions in the EU VAT Directive. However, a taxpayer can also elect to determine the deductible portion based on another distribution basis through the application of the VAT law. For companies that have applied a different distribution basis according to the Swedish Tax Agency's guidelines or have been denied the use of turnover as the distribution basis, the decision offers an opportunity to calculate the deductible portion based on turnover as the distribution basis. In light of the Supreme Administrative Court decision, affected businesses may wish to review their distribution bases for future use and possibly request a reassessment of previous deductions, which can go back six years.