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Dutch VAT rate change: potential saving in life science & health care sector

The Dutch government has announced plans for an increase of the current reduced VAT rate from 6% to 9%. This change will be part of the 2019 Tax Plan and will become effective on January 1st 2019.

19 June 2018

The State Secretary of Finance, Menno Snel, communicated in the Dutch media that if companies receive prepayments in 2018 for supplies in 2019, these companies are not required to remit additional VAT as a consequence of an increase of the reduced VAT rate from 6% to 9%.

Potential saving

Based on the aforementioned communication it can be beneficial for the life science and health care industry to work with prepayments for supplies scheduled in 2019. In case customers are not entitled to (full) recovery of input VAT, it will lead to a saving up to 3% of the transaction value.

Also, if substantial costs are expected in 2019 for costs subject to the reduced VAT rate and for which the recovery of input VAT is restricted (for example in relation to employee benefits) it may be beneficial to agree with suppliers on prepayments.

It is important to make sure that the payments qualify as prepayments for VAT purposes. This means that all the relevant information concerning the chargeable event, namely the future delivery or future performance, must already be known at the moment of the prepayment. In particular the goods or services must be precisely identified.  

Transitional provisions

In the past, the Dutch Ministry of Finance always introduced transitional provisions in case of changes in VAT rates. The common practice is that in such a case the VAT rate is determined at the moment the supply takes place. This generally leads to adjustments for prepayments received before the new rate applies. In this respect the communication of the State Secretary is unexpected and it is uncertain whether transitional provisions might be introduced for the 2019 rate change.

Practical consequences

Besides trying to benefit from prepayments, it is important to consider how the change of the VAT rate impacts for example:

- Pricing of products
- Existing contracts
- Invoicing
- ERP system settings

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