Opinion of the Advocate General — ECLI:EU:C:2005:185
Date: 2005-03-17
Language of the case: English
Based on: Treaty establishing the European Economic Community (1957)
Subject matter: Taxation;Value added tax
Procedure: Reference for a preliminary ruling
Origin: United Kingdom

summary it may be stated that the rules on deduction of input tax seek to ensure that inputs remain free of tax in so far as they are used for the provision of taxable supplies. The entire value is taxed once only on the supply to the consumer. There should not be any additional taxation of inputs. However, tax losses must also be avoided by not allowing deduction for input tax on items which are not actually (entirely) used in order to effect taxable supplies. 32. The provisions concerning the deductible proportion of input tax and the adjustment of such deduction seek as far as possible to ensure the neutrality of VAT (not to say to uphold the principle of a single charge to tax). In the words of the representative of Centralan, they increase the degree of accuracy of the deduction. 33. On the other hand the rules on deduction of input tax must be clear and practicable. Thus, for example, regard is not had to the extent to which each individual good is used in connection with taxable supplies. Rather, the deductible proportion in respect of input tax is ascertained in relation to the taxable person’s total supplies and then applied uniformly to the deduction of input tax in respect of all inputs. Also it is only in the case of capital goods that use of a good acquired with deduction of input tax is observed over a long period with a view to adjustment of the tax deducted. B – Interpretation of Article 20(3) of the Sixth Directive 34. In light of the objectives of the provisions concerning deduction and its adjustment, it must now be examined which of the interpretative variants is best able to meet these objectives. In that connection the starting point is the wording of the provision. 1. Concept of supply 35. A precondition of the application of Article 20(3) of the Sixth Directive is that the capital good is supplied to a third party during the adjustment period. According to Centralan and the Commission, only disposal of the freehold reversion constitutes a supply. If that were true, interpretive variants (b) and (c) would be eliminated ab initio. For they are based on the assumption that the 999 year lease likewise constitutes a supply within the meaning of Article 20(3) of the Sixth Directive. 36. Supply is defined in Article 5(1) as of the Sixth Directive as ‘the transfer of the right to dispose of tangible property as owner’. By reference to English law, the Commission considers that only upon transfer of the freehold reversion is there a transfer of property rights. 37. This view cannot be upheld. For, as the Court held in its judgment in Shipping and Forwarding Enterprise Safe, it follows from the wording of Article 5(1) of the Sixth Directive: ‘that “supply of goods” does not refer to the transfer of ownership in accordance with the procedures prescribed by the applicable national law but covers any transfer of tangible property by one party which empowers the other party actually to dispose of it as if he were the owner of the property’. (16) 38. Underlying that case was a device analogous to that in the present case. First, the right was transferred freely to dispose of the property in question (economic ownership). The (legal) ownership was then transferred separately form the economic ownership. The Court already considered the transfer of economic ownership to constitute a supply within the meaning of Article 5(1) of the Sixth Directive. 39. Accordingly, the grant of a 999 year lease to Inhoco may already constitute a supply if Inhoco thereby receives authorisation to dispose of the property as an owner. In favour of that view is the fact that, in return for a one-off payment, Inhoco acquires rights of user for a very long period as well as the right to payments of rent under the 20 year lease with the University. The 999 year lease therefore approximates very closely to the transfer of economic ownership which was involved in Shipping and Forwarding Enterprise Safe. However, in the final analysis this is a matter to be established by the referring court which is competent to apply the law in the main proceedings. 40. It might even be wondered whether only the 999 year lease constitutes a supply since the freehold reversion transfers such a bare title that it cannot be described as the transfer of genuine property rights. In that case only interpretative variant (b) would apply. Against that, however, is the fact that it is scarcely possible for a demarcation line to be drawn between cases in which the title is bare to the extent that there is no supply and cases in which there is a sufficiently substantive title. Is the demarcation line to be drawn at a 99 year lease, a 199 year lease or a 999 year lease? In order in this connection to avoid arbitrary demarcations, in a case such as this, transfer of the reversionary title should in principle still be regarded as a supply. 41. None the less the Commission objects that property rights cannot be conferred on two persons. However, that objection cannot be upheld. For example, property can very well be transferred in co-ownership to a plurality of persons. Thus, owners of apartments as a rule acquire co-ownership shares in the common parts of the house, such as for example the stairs and passageways, as well as a notional share in the plot on which the house was built. Thus, if several persons can at the same time have property rights in relation to the same property, that must apply a fortiori, when the different legal rights are temporally demarcated. First, Inhoco can for 999 years claim rights under the lease. Only subsequently thereto do the rights arising out of the freehold reversion become current; these are essentially confined to the claim to surrender of the property on expiry of the lease. 42. As an interim conclusion it may be stated that both the first transaction, the 999 year lease, and the second transaction, namely transfer of the freehold reversion, may constitute supplies within the meaning of Article 5(1) of the Sixth Directive. Since the same concept of supply may be presumed to underpin Article 20(3) of the Sixth Directive, both transactions may be significant in the context of the adjustment of input tax. Thus, none of the interpretative variants is precluded solely on the ground that one of the transactions does not meet the requirements of a supply for the purposes of that provision. 2. Relevant transaction in the case of several supplies 43. It remains to clarify which supply is relevant for the adjustment of input tax if the item is supplied in several transactions to various persons. This could be: the last transaction by which the taxable person definitively cedes his interest in the item, the economically most significant transaction or all transactions together. 44. The wording appears to suggest that there is only one supply. Under that wording business activities are presumed to be fully taxed ‘where the delivery of the said goods is taxed; they are presumed to be fully exempt where the delivery is exempt’. (17) 45. However, it cannot be inferred solely from that wording that regard is to be had to only one transaction where delivery is effected in several transactions. The drafters of the directive had in contemplation the normal case where the item is delivered in one transaction. If by means of that formulation they had meant to say that, in the case of supplies comprising several transactions, only one transaction is relevant it would have been necessary to state which is the relevant transaction in such a case. It is rather the case that, in relation to situations in which delivery is effected by means of several transactions, Article 20(3) of the Sixth Directive contains a regulatory lacuna. That lacuna is to be filled by a supplementary interpretation of the provision in light of the regulatory context and its meaning and purpose. 46. The rules on deduction of input tax seek to render inputs free of tax exactly in the proportion in which they are required in order to effect taxable transactions. That aim is best achieved by means of interpretative variant (c). Use partly for taxable and partly for exempt activities is most accurately reflected by apportionment as between the two transactions for the purposes of the adjustment of input tax. 47. Neither of the other two interpretative variants achieve that objective to the same extent. It is true that in the case of variant (b) adequate regard is had to the emphasis on use. The fact that the taxable transfer of the freehold reversion is disregarded is not serious in light of the minimal value of that transaction in the present case. However, inherent in this method of proceeding is a lack of precision which in other situations, where there is not such a wide discrepancy between transaction values, can lead to incoherent results. 48. Interpretative variant (a) completely fails to meet the objective of ensuring a connection between the deduction of input tax and the extent of use of the item concerned for taxable transactions. Although the taxable transfer of the freehold reversion constitutes only delivery of a negligible right in the building, variant (a) would result in a total deduction of input tax. 49. The fact that in certain situations an apportionment is appropriate, even if not expressly provided for by the wording of the relevant provision of the Sixth Directive, is borne out by the following examples from the case-law. 50. For example in the Armbrecht judgment the Court held that, where a taxable person sells property part of which he had chosen to reserve for his private use, he does not act with respect to the sale of that part as a taxable person within the meaning of Article 2(1) of the Sixth Directive. (18) Thus, the Court interpreted Article 2(1) as meaning that a supply is taxable in so far as a taxable person carries out the transaction acting as a taxable person. For its part, the wording refers only to supplies made by a taxable person acting as such. 51. In Enkler (19) the Court was called on to reply to questions in connection with a motor caravan which was used partly for business purposes and partly for private purposes. In order to determine the taxable amount for the purposes of Article 11A(1)(c) of the Sixth Directive it required an apportionment of the expenses of the motor caravan corresponding to the amount of time of the non-business use. (20) 52. However, Centralan objects in the case of interpretative variant (c) that only on transfer of the freehold reversion is the building completely removed from the undertaking’s assets. Only then is the adjustment to be carried out. 53. All that may be inferred from Article 20(3) of the Sixth Directive is that the adjustment is to be effected at the time of delivery. However, the provision contains no indication that, in the case of two transactions which occur in swift succession and are both to be categorised as supplies, only the last transaction is to be relevant for the purposes of the adjustment of input tax. 54. Yet, if regard is had solely to the last supply transaction, that can lead to entirely arbitrary consequences, as elucidated by the United Kingdom Government on the basis of an example of a piece of agricultural land initially acquired with deduction of input tax, subsequently split into two parts and then sold on. In that connection it is assumed that the sale of one part attracts tax because that part has in the meantime been turned into building land whilst the sale of the other part which continues to be used for agricultural purposes is tax exempt. If one declines to take an overall view of all sales transactions and instead has regard only to the last transaction, the taxable person could influence adjustment of input tax at will by concluding one or other transaction first. To have regard only to the last supply transaction would thus afford to the taxable person possibilities of making arrangements which run counter to the objectives of the directive. 55. That is also illustrated by the present case. Although by means of a tax-exempt supply (the 999 year lease) the building is to a very great extent separated from Centralan’s assets, the deduction of input tax would be maintained in full if one were to focus solely on the second merely symbolic transfer of the freehold reversion. 56. Finally, Centralan and the Commission point to the practical difficulties which are alleged to stem from interpretative variant (c). However, it cannot be established why apportionment of the taxable supply is not practicable on adjustment of the deduction of input tax. In ascertaining the deductible proportion under Article 17(5) and Article 19 of the Sixth Directive the calculations to be made are in any event more demanding. Moreover, the adjustment is to be made only in connection with capital goods disposed of during the adjustment period. 57. According to Centralan and the Commission, specific problems would arise if the supplies in respect of which an apportionment was to be made were not all effected in the same adjustment periods. However, that is a hypothetical situation which does not arise in the present case. 58. Irrespective of that fact, in such a case there are in fact no insuperable difficulties. Where in one year a capital good is partly removed from the business assets, under Article 20(3) of the Sixth Directive, the final adjustment of the input tax deduction in respect of that part must be effected for the remainder of the adjustment period. As regards the remaining part, the value of which is to be assessed on the basis of appropriate methods, the adjustment is spread over subsequent periods under Article 20(2) until that part is removed by a further supply within the meaning of paragraph 3 and in that regard final adjustment is effected. 59. Thus, in the present situation, Article 20(3) of the Sixth Directive must be interpreted as meaning that the capital good is regarded, until the expiry of the period of adjustment, as if it had been used for business activities which are partly taxed and partly exempt in the proportion of the respective values of the taxed sale of the freehold reversion and the tax exempt grant of the 999 year lease. C – Abuse of rights 60. In view of that solution it does not need to be examined whether and to what extent there is a prohibition on the abuse of rights in the area of VAT, the circumstances in which that prohibition applies and the legal consequences flowing therefrom. Nor is there any ground for reopening the written procedure. 61. It is true that the transactions have an artificial effect and are aimed solely at affording the University the possibility of deducting the VAT paid on the construction of the Harrington Building, even though the University to a great extent provides tax exempt services. The interpretation of the Sixth Directive which I am here advocating, however, precludes these artificial transactions from giving rise to a tax exemption which would run counter to the objectives of the directive and would have to be remedied by recourse to unwritten principles such as the prohibition on the abuse of rights. VI – Conclusion 62. In light of the foregoing considerations, I propose that the Court should reply as follows to the question referred by the High Court of Justice (Chancery Division): Where a building is disposed of by means of two preordained and independent supplies, that is to say by a tax exempt grant of a 999 year lease over the building and, three days later, by a taxable sale of the freehold reversion, Article 20(3) of Sixth Council Directive 77/388/EEC of 17 May 1977, on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, is to be interpreted as meaning that the capital good is regarded until the expiry of the period of adjustment as if it had been used for business activities which are partly taxed and partly exempt in the proportion of the respective values of the taxed sale of the freehold reversion and the tax exempt grant of the 999 year lease. 1 – Original language: German. 2 – Sixth Council Directive of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1). 3 – Cases C-255/02 (Halifax), C-419/02 (BUPA Hospitals) and C-223/03 (University of Huddersfield). 4 – The possibility of extending the adjustment period in the case of buildings to 20 years was introduced only by Council Directive 95/7/EC of 10 April 1995 amending Directive 77/388/EEC and introducing new simplification measures with regard to value added tax – scope of certain exemptions and practical arrangements for implementing them (OJ 1995 L 102, p 18). Previously provision was made in the Sixth Directive for only 10 years. 5 – In that connection Centralan appears to have made use of its option under Article 13(C) of the Sixth Directive with the result that, by way of exception from Article 13 B(b) of the Sixth Directive, it was not tax-exempt. 6 – This provision was in force only between 30 November 1994 and 26 November 1996. 7 – The Commission refers to the cases pending in relation to VAT (cited in footnote 3). 8 – The Commission relies chiefly on the definition of abuse of rights laid down in the judgment in Case C-110/99 Emsland-Stärke [2000] ECR I-11569, paragraphs 52 and 53. However, that judgment relates to export refunds for agricultural products. 9 – See judgments in Case C-62/93 BP Supergas [1995] ECR I-1883, paragraph 18, Joined Cases C‑110/98 to C-147/98 Gabalfrisa and Others [2000] ECR I-1577, paragraph 43, and Case C‑90/02 Bockemühl [2004] ECR I-0000, paragraph 38. 10 – Cf. inter alia judgments in Case 268/83 Rompelman [1985] ECR 655, paragraph 19, Case C‑37/95 Ghent Coal Terminal [1998] ECR I-1, paragraph 15, and judgments in Gabalfrisa, cited in footnote 9, paragraph 44, and Bockemühl, cited in footnote 9, paragraph 39. 11 – Judgment in case C-137/02 Faxworld [2004] ECR I-0000, paragraph 24. 12 – Cf. judgments cited in footnote 9 as well as judgments in Case C-97/90 Lennartz [1991] ECR I‑3795, paragraph 27, and Case C-409/99 MetropolandStadler [2002] ECR I-81, paragraph 42, and judgment in Case C-152/02 Terra-Baubedarf [2004] ECR I-0000, paragraph 35. 13 – Cf. judgment in Case C-400/98 Breitsohl [2000] ECR I-4321, paragraph 36, and the judgment in TerraBaubedarf (cited in footnote 12, paragraph 31). 14 – Cf. opinion of Advocate General Lenz of 15 February 1996 in Case C-306/94 RégieDauphinoise [1996] ECR I-3695 (at point 37). 15 – Cf. on the corresponding provisions of the Second VAT Directive, judgment in Case 51/76 Verbond van Nederlandse Ondernemingen [1977] ECR 113 (paragraphs 12 and 13). 16 – Case C-320/88 Shipping and Forwarding Enterprise Safe [1990] ECR I-285, paragraphs 7 and 8. See also judgment in Case C-185/01 Auto LeaseHolland [2003] ECR I-1317, paragraph 32. 17 – Emphasis added 18 – Case C-291/92 Armbrecht [1995] ECR I-2775, paragraph 24. 19 – Case C-230/94 Enkler [1996] ECR I-4517. 20 – .Enkler (cited in footnote 19, paragraph 37).