Van Laarhoven, a single proprietor and as such entrepreneur for VAT purposes, has two company cars. In 2006 he used both cars for private purposes for more than 500 kilometres and therefore he made a correction of the input VAT incurred and reclaimed when he purchased both cars. In The Netherlands, the correction for private use of company cars owned by an entrepreneur and used by the entrepreneur for private purposes should be made once a year in the last VAT return of that year. The calculation for this correction for private use is on a flat-rate method of calculating expenses and similar to the calculation that should be made in relation to Dutch Personal Income Tax.
Van Laarhoven filed an appeal against the VAT return in which the correction for private use as outlined above has been made, stating that the applicable percentages of the flat-rate method was amended several times by the Dutch government. For that reason, Van Laarhoven argued that the Dutch VAT law in this respect is not line with the stand-still clause of the European VAT Directive. After rejection of this appeal by the Dutch Lower Court, the Dutch Supreme Court decided to question with the European Court of Justice whether the past amendments in the calculation of the correction of private use are allowed considering the stand-still clause of the European VAT Directive.
The European Court of Justice decided that the European stand-still clause only applies to local VAT legislation that limits the right of entrepreneur to reclaim input VAT incurred. Due to the stand-still clause, existing limitations are allowed. The application of these limitations, however, may not be extended. The Dutch correction of private use allows entrepreneurs in first instance to fully reclaim input VAT incurred after purchasing a company car. Subsequently, private use of this company car is a (deemed) supply of services by the entrepreneur subject to Dutch VAT. Therefore the European Court of Justice concluded that there is in principle no limitation of the right of Van Laarhoven to reclaim input VAT incurred with the purchase of the company cars. Subsequently, the European Court of Justice concluded that the stand-still clause of the European VAT Directive is not relevant in the case at hand.
However, in addition to the above the European Court of Justice concluded that since the Dutch correction of the private use of company cars is calculated on a flat-rate method of calculating expenses only, this method of calculating does not sufficiently take into account on a proportional basis the actual extent of the private use of both company cars by Van Laarhoven. Therefore the European Court of Justice decided that this correction method for private use of company cars by VAT entrepreneurs is not in line with the European VAT Directive.
Please note that as of July 2011 the applicable Dutch VAT legislation has been changed in this respect. Under the new applicable rules for the correction of private use of company cars, Dutch VAT entrepreneurs should keep a record of all privately driven kilometres. Alternatively, the VAT entrepreneur could use a flat-rate method of calculating expenses in order to calculate its yearly correction for private use of a company car. Question remains, however, whether the latter method is in line with the European VAT directive.
(ECJ 16 February 2012, C-594/10 "Van Laarhoven")