Royal Bank of Scotland plc v The Commissioners of Her Majesty's Revenue & Customs.
Date: 2008-12-18
14. The Court has consistently held that the right to deduct provided for in Article 17 et seq. of the Sixth Directive is an integral part of the VAT scheme and, in principle, may not be limited (Case C‑243/03 Commission  v France [2005] ECR I‑8411, paragraph 28 and the case‑law cited).
15. 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 Case C‑408/98 Abbey National [2001] ECR I‑1361, paragraph 24 and the case‑law cited).
16. Accordingly, where goods or services acquired by a taxable person are used for purposes of transactions that are exempt or do not fall within the scope of VAT, no output tax can be collected or input tax deducted (Case C‑72/05 Wollny  [2006] ECR I‑8297, paragraph 20).
17. Article 17(5) of the Sixth Directive lays down the rules applicable to the right to deduct VAT where the VAT relates to goods or services 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’. In such a case, the first subparagraph of Article 17(5) of the Sixth Directive provides that only such proportion of the VAT is deductible as is attributable to the former taxable transactions ( Abbey National , paragraph 37, and Case C‑16/00 Cibo Participations  [2001] ECR I‑6663, paragraph 34).
18. Under the second subparagraph of Article 17(5) of the Sixth Directive, the deductible amount is calculated according to a proportion fixed in accordance with Article 19 of that directive.
19. The third subparagraph of Article 17(5) nevertheless allows derogation from that rule by permitting Member States to employ one of the other methods for determining the deductible amount listed in that subparagraph, namely determination of a separate proportion for each sector of business or deduction on the basis of the use made of all or part of the goods and services for a specific activity, or they may even exclude the right of deduction in certain circumstances.
21. Contrary to what Royal Bank of Scotland contends, the rounding up rule in the second subparagraph of Article 19(1) of the Sixth Directive is not applicable where a particular type of case is subject to a special set of rules laid down in the third subparagraph of Article 17(5) of that directive.
22. As is quite clear from the wording of Articles 17(5) and 19(1) of the Sixth Directive, the latter provision refers only to the proportion deductible under the first subparagraph of Article 17(5) of the directive, and therefore lays down a detailed rule for calculating the proportion referred to in that provision only.
23. That is also the conclusion to be drawn from the overall scheme of the provisions in question. While the second subparagraph of Article 17(5) provides for the application of Article 19 as the rule for calculation of the deductible amount, the third subparagraph, which starts with the word ‘however’, allows Member States to provide for derogations of greater or lesser scope from that rule, extending even as far as excluding the right of deduction.
24. Finally, that conclusion is also confirmed by the purpose of (a) to (d) of the third subparagraph of Article 17(5) of the Sixth Directive, the aim of which is in particular, as the Commission contends, to permit Member States to achieve greater accuracy by taking into account the specific characteristics of the taxable person’s activities. Accordingly, Member States must be in a position to apply more accurate rounding up rules than those provided for in the second subparagraph of Article 19(1) of the Sixth Directive. If Member States were obliged, for reasons of simplification, to round up in accordance with the latter method, which is less accurate, that would be contrary to the objective of those derogations.
25. It follows that, where a particular case is subject to such a special scheme allowing for derogations, the rule for calculating the deductible proportion in Article 19 of the Sixth Directive is inapplicable in that case. Thus, Member States are not obliged to apply the rounding up rule in that provision where they employ the methods of calculation set out in (a), (b), (c) or (d) of the third subparagraph of Article 17(5) of that directive but may adopt their own rounding up rules, provided that they observe the principles underpinning the common system of VAT (see Case C‑484/06 Koniklijke Ahold  [2008] ECR I‑0000, paragraph 33).
27. Nor can it be said that the principle of fiscal neutrality, which reflects the principle of equal treatment, or the principle of proportionality require that a single method of rounding up be applied for all those methods of calculation (see, to that effect, Koninklijke Ahold , paragraphs 37 and 41).