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VAT Voice by Steve Allen

Steve Allen, Director of VAT Solutions (UK) Ltd, comments on a recent ECJ decision concerning the VAT treatment of capital goods used for business and private purposesOn 14 July 2005, the ECJ released its judgment in the case of P. Charles and T.S. Charles-Tijmens v Staatssecretaris van Financien (C-434/03), a Dutch referral on the VAT treatment of capital goods used partly in a business and partly outside the business (in particular for private purposes).

The facts

The appellants purchased a holiday bungalow in March 1997, and in the year of purchase, the use was to be 87.5% for holiday lettings by the appellants (a taxable operation) and 12.5% for their own private use. In accordance with Dutch law, the appellants were initially granted a deduction of 87.5% of the VAT on the purchase. The appellant subsequently made an application for refund of the remaining 12.5%, their argument being that they had an entitlement to recognise the private use as giving rise to an output tax charge under Article 6(2), from which it followed that they had a right to allocate the bungalow wholly to the assets of the business, and take a 100% deduction on its purchase under Article 17(2). The Dutch tax authorities refused the deduction on the grounds that no such provision was embodied in Dutch law, which they justified by reference to the derogatory power in the second sub-paragraph of Article 6(2), and by reference to Article 17(6) and the fact that the same deduction rules had existed in the Netherlands prior to the Sixth Directive coming into force.

Point at issue

The referral to the ECJ asks whether Articles 6(2) and 17(2) and (6) must be interpreted as precluding national legislation adopted before the Sixth Directive came into force, which prevents a taxable person allocating wholly to his business capital goods used in part for business purposes and in part for non/business private purposes, and which, in such a situation, does not authorise immediate deduction in full of the VAT due on the acquisition of those goods, and does not provide that their use for purposes other than those of the business is treated as a supply of services for consideration.

The earlier ECJ cases of Lennartz, Bakcsi, and Seeling had already held that where goods forming part of the assets of a business have given rise to full or partial input tax deduction, their use for the private non/business purposes is treated as a supply of services for consideration under Article 6(2). That use is, therefore, a taxable supply within the meaning of the deduction rules of Article 17(2), with Article 11(A)(1)(c) prescribing the basis of valuation of that supply. The Court then asks whether a Member State can thus deny that inter-relationship between Article 6(2) and Article 17(2) as suggested by the Netherlands Government.

ECJ Decision

The Court found that, whilst the second sub-paragraph of Article 6(2) enables Member States to refrain from treating certain transactions as falling within Article 6(2) in order to simplify administrative procedures relating to collection of VAT, the sub-paragraph does not go so far as to enable a Member State to deny completely the application of Article 6(2) where the taxable person has chosen to treat capital goods used for both business and private purposes as business goods. In response to the Article 17(6) 'standstill' provision argument, the Court held that Article 17(6) can only 'grandfather' a deduction rule which existed prior to the Sixth Directive, where that rule was lawful under the European law which existed before that time. As the Dutch rule went beyond the discretion given to Member States under the deduction rules of Article 11(4) of the Second Directive, which predated the Sixth Directive, Article 17(6) cannot be used to justify the continuation of those national rules post-introduction of the Sixth Directive. The Court therefore ruled in favour of the appellants

COMMENT

There has been a reluctance in the UK by HMRC to accept fully that a taxable person, when buying goods for part business and part private/non-business purposes has an unfettered right either to make a proportionate deduction based on use in the year of acquisition (with subsequent adjustment of that deduction under the capital goods scheme, if applicable) or to take a full deduction on acquisition where the goods are treated as assets of the business, with an output tax charge arising on the private/non-business use valued under Article 11(A)(1)(c). Customs Business Brief 22/03 broadly accepted the position in relation to goods, but accepted the position in relation to services only in very limited circumstances. This judgment clearly conflicts with the HMRC position, and suggests that the 'Lennartz approach' is applicable to services too. This decision is likely to be of particular interest to charities, colleges, and universities.


August 2005

Steve Allen
Director, VAT Solutions (UK) Ltd
Email: steveallen@vatsolutions-uk.com

VAT Solutions (UK) Ltd
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VAT Solutions (UK) Limited is an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from the Internet via the following address: www.vatsolutions-uk.com/newsletter.doc