Abbey National plc v Commissioners of Customs & Excise.
Date: 2001-02-22
24 It should be noted, to begin with, that the deduction system is meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities. The common system of VAT consequently ensures complete neutrality of taxation of all economic activities, whatever their purpose or results, provided that they are themselves subject in principle to VAT (see, to that effect, Case 268/83 Rompelman v Minister van Financiën [1985] ECR 655, paragraph 19; Case C-37/95 Belgian State v Ghent Coal Terminal [1998] ECR I-1, paragraph 15; Joined Cases C-110/98 to C-147/98 Gabalfrisa and Others v Agencia Estatal de Administración Tributaria [2000] ECR I-1577, paragraph 44; and Case C-98/98 Customs and Excise v Midland Bank [2000] ECR I-4177, paragraph 19).
25 Article 17(5) of the Sixth Directive, in the light of which paragraph 2 of that article must be interpreted, lays down the rules applicable to the right to deduct VAT where the VAT relates to input transactions used by the taxable person both for transactions covered by paragraphs 2 and 3, in respect of which value added tax is deductible, and for transactions in respect of which value added tax is not deductible. The use in that provision of the words for transactions shows that to give rise to the right to deduct under paragraph 2 the goods or services acquired must have a direct and immediate link with the output transactions which give rise to the right to deduct, and that the ultimate aim pursued by the taxable person is irrelevant in this respect (see Case C-4/94 BLP Group v Customs and Excise [1995] ECR I-983, paragraphs 18 and 19, and Midland Bank, paragraph 20).
26 As the Court held in paragraph 24 of Midland Bank, Article 2 of the First Directive and Article 17(2), (3) and (5) of the Sixth Directive must be interpreted as meaning that, in principle, the existence of a direct and immediate link between a particular input transaction and a particular output transaction or transactions giving rise to the right to deduct is necessary before the taxable person is entitled to deduct input VAT and in order to determine the extent of such entitlement.
27 It should also be borne in mind that, according to the fundamental principle which underlies the VAT system, and which follows from Article 2 of the First Directive and Article 2 of the Sixth Directive, VAT applies to each transaction by way of production or distribution after deduction of the VAT directly borne by the various cost components (Midland Bank, paragraph 29).
28 It follows from that principle, as well as from the rule that, in order to give rise to the right to deduct, the goods or services acquired must have a direct and immediate link with the taxable transactions, that the right to deduct the VAT borne by those goods or services presupposes that the expenditure incurred in acquiring them was part of the cost components of the taxable transactions. That expenditure must therefore form part of the costs of the output transactions which use the goods and services acquired. Consequently, those cost components must generally have arisen before the taxable person carried out the taxable transactions to which they relate (see Midland Bank, paragraph 30).
30 Article 5(8) of the Sixth Directive provides that Member States may, on a transfer of a totality of assets or part thereof, consider that no supply of goods has taken place and that the recipient is the successor to the transferor. It follows that if a Member State has made use of that option the transfer of a totality of assets or part thereof is not regarded as a supply of goods for the purposes of the Sixth Directive. Under Article 2 of the directive, such a transfer is thus not subject to VAT, and consequently cannot constitute a taxable transaction within the meaning of Article 17(2).
31 Abbey National, however, submits that since under Article 5(8) of the Sixth Directive the transferee is the successor of the transferor, the transferor may take into account the taxable supplies of the transferee so as to be able to deduct all the VAT on the expenditure incurred for the services acquired in order to effect the transfer.
32 That argument cannot be accepted. First, it is clear from Article 17(2) of the Sixth Directive that a taxable person may deduct only the VAT on the goods and services used for the purposes of his own taxable transactions. Second, in any event, the amount of VAT paid by the transferor on the costs incurred for the services acquired in order to carry out a transfer of a totality of assets or part thereof does not directly burden the various cost components of the transferee's taxable transactions, as required by Article 2 of the First Directive. Those costs do not form part of the costs of the output transactions which use the goods and services acquired.
35 However, the costs of those services form part of the taxable person's overheads, and as such are cost components of the products of a business. Even in the case of a transfer of a totality of assets, where the taxable person no longer effects transactions after using those services, their costs must be regarded as part of the economic activity of the business as a whole before the transfer. Any other interpretation of Article 17 of the Sixth Directive would be contrary to the principle that the VAT system must be completely neutral as regards the tax burden on all the economic activities of a business provided that they are themselves subject to VAT, and would make the economic operator liable to pay VAT in the context of his economic activity without giving him the possibility of deducting it (see, to that effect, Gabalfrisa, paragraph 45). An arbitrary distinction would thus be drawn between expenditure incurred for the purposes of a business before it is actually operated and that incurred during its operation, on the one hand, and, on the other hand, the expenditure incurred in order to terminate its operation.
36 Thus in principle the various services used by the transferor for the purposes of the transfer of a totality of assets or part thereof have a direct and immediate link with the whole economic activity of that taxable person.
37 It follows from Article 17(5) of the Sixth Directive that a taxable person who effects both transactions in respect of which VAT is deductible and transactions in respect of which it is not may deduct only that proportion of the VAT which is attributable to the former transactions.
38 However, as the Court held in paragraph 26 of the Midland Bank judgment, a taxable person who effects transactions in respect of which VAT is deductible and transactions in respect of which it is not may nevertheless deduct the VAT charged on the goods or services acquired by him, where those goods or services have a direct and immediate link with the output transactions in respect of which VAT is deductible, without it being necessary to differentiate according to whether Article 17(2), (3) or (5) of the Sixth Directive applies.