Halifax plc, Leeds Permanent Development Services Ltd and County Wide Property Investments Ltd v Commissioners of Customs & Excise.
Date: 2006-02-21
48. It must be remembered first of all that the Sixth Directive establishes a common system of VAT based, inter alia, on a uniform definition of taxable transactions (see, in particular, Case C-305/01 MGK-Kraftfahrzeuge-Factoring  [2003] ECR I-6729, paragraph 38).
49. In that regard, under the Sixth Directive the scope of VAT is very wide in that Article 2 thereof, which concerns taxable transactions, refers not only to imports of goods but also to the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such.
50. As regards, first, the term ‘supply of goods’, Article 5(1) of the Sixth Directive states that any transfer of the right to dispose of tangible property as owner constitutes such a supply.
51. It is clear from the case-law of the Court that that term covers any transfer of tangible property by one party who empowers the other party actually to dispose of it as if he were the owner of the property (see, in particular, Case C-320/88 Shipping and Forwarding Enterprise Safe  [1990] ECR I-285, paragraph 7, and Case C-25/03 HE  [2005] ECR I-3123, paragraph 64).
52. As regards the term ‘supply of services’, it is clear from Article 6(1) of the Sixth Directive that it covers all transactions not constituting a supply of goods within the meaning of Article 5 of that directive.
53. Next, according to Article 4(1) of the Sixth Directive, any person who independently carries out any economic activity, whatever the purpose or results of that activity, is regarded as a taxable person.
54. Finally, the term ‘economic activity’ is defined in Article 4(2) of the Sixth Directive as comprising ‘all’ activities of producers, traders and persons supplying services, and, according to the case-law, it includes all stages of production, distribution and the provision of services (see, in particular, Case C-186/89 Van Tiem  [1990] ECR I-4363, paragraph 17, and MGK-Kraftfahrzeuge-Factoring , paragraph 42).
55. As the Court held in paragraph 26 of its judgment in Case C-260/98 Commission  v Greece  [2000] ECR I-6537, an analysis of the definitions of taxable person and economic activities shows that the scope of the term economic activities is very wide, and that the term is objective in character, in the sense that the activity is considered per se and without regard to its purpose or results (see also Case 235/85 Commission  v Netherlands  [1987] ECR 1471, paragraph 8, and, to that effect, in particular Case 268/83 Rompelman  [1985] ECR 655, paragraph 19, and Case C-497/01 Zita Modes [2003] ECR I-14393, paragraph 38).
56. That analysis and that of the terms ‘supply of goods’ and ‘supply of services’ show that those terms, which define taxable transactions under the Sixth Directive, are all objective in nature and apply without regard to the purpose or results of the transactions concerned (see, to that effect, Joined Cases C-354/03, C-355/03 and C-484/03 Optigen and Others  [2006] ECR I-0000, paragraph 44).
57. As the Court held in paragraph 24 of its judgment in Case C-4/94 BLP Group  [1995] ECR I-983, an obligation on the tax authorities to carry out inquiries to determine the intention of the taxable person would be contrary to the objectives of the common system of VAT of ensuring legal certainty and facilitating the application of VAT by having regard, save in exceptional cases, to the objective character of the transaction in question.
58. It follows that transactions of the kind at issue in the main proceedings are supplies of goods or services and an economic activity within the meaning of Article 2(1), Article 4(1) and (2), Article 5(1) and Article 6(1) of the Sixth Directive, provided that they satisfy the objective criteria on which those concepts are based.
59. It is true that those criteria are not satisfied where tax is evaded, for example by means of untruthful tax returns or the issue of improper invoices. The fact nevertheless remains that the question whether a given transaction is carried out for the sole purpose of obtaining a tax advantage is entirely irrelevant in determining whether it constitutes a supply of goods or services and an economic activity.
68. Notwithstanding that finding, it must be borne in mind that, according to settled case-law, Community law cannot be relied on for abusive or fraudulent ends (see, in particular Case C-367/96 Kefalas and Others [1998] ECR I-2843, paragraph 20; Case C-373/97 Diamantis  [2000] ECR I-1705, paragraph 33; and Case C-32/03 Fini H  [2005] ECR I-1599, paragraph 32).
69. The application of Community legislation cannot be extended to cover abusive practices by economic operators, that is to say transactions carried out not in the context of normal commercial operations, but solely for the purpose of wrongfully obtaining advantages provided for by Community law (see, to that effect, Case 125/76 Cremer  [1977] ECR 1593, paragraph 21; Case C-8/92 General Milk Products  [1993] ECR I-779, paragraph 21; and Emsland-Stärke , paragraph 51).
70. That principle of prohibiting abusive practices also applies to the sphere of VAT.
71. Preventing possible tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive (see Joined Cases C-487/01 and C-7/02 Gemeente Leusden and Holin Groep  [2004] ECR I-5337, paragraph 76).
72. However, as the Court has held on numerous occasions, Community legislation must be certain and its application foreseeable by those subject to it (see, in particular, Case C-301/97 Netherlands  v Council  [2001] ECR I-8853, paragraph 43). That requirement of legal certainty must be observed all the more strictly in the case of rules liable to entail financial consequences, in order that those concerned may know precisely the extent of the obligations which they impose on them (Case 326/85 Netherlands  v Commission  [1987] ECR 5091, paragraph 24, and Case C-17/01 Sudholz  [2004] ECR I-4243, paragraph 34).
73. Moreover, it is clear from the case-law that a trader’s choice between exempt transactions and taxable transactions may be based on a range of factors, including tax considerations relating to the VAT system (see, in particular, BLP Group , paragraph 26, and Case C-108/99 Cantor Fitzgerald International  [2001] ECR I-7257, paragraph 33). Where the taxable person chooses one of two transactions, the Sixth Directive does not require him to choose the one which involves paying the highest amount of VAT. On the contrary, as the Advocate General observed in point 85 of his Opinion, taxpayers may choose to structure their business so as to limit their tax liability.
74. In view of the foregoing considerations, it would appear that, in the sphere of VAT, an abusive practice can be found to exist only if, first, the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of the Sixth Directive and the national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions.
75. Second, it must also be apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage. As the Advocate General observed in point 89 of his Opinion, the prohibition of abuse is not relevant where the economic activity carried out may have some explanation other than the mere attainment of tax advantages.
76. It is for the national court to verify in accordance with the rules of evidence of national law, provided that the effectiveness of Community law is not undermined, whether action constituting such an abusive practice has taken place in the case before it (see Case C-515/03 Eichsfelder Schalchtbetrieb  [2005] ECR I-0000, paragraph 40).
77. However, the Court, when giving a preliminary ruling, may, where appropriate, provide clarification designed to give the national court guidance in its interpretation (see, in particular, Case C-79/01 Payroll and Others  [2002] ECR I-8923, paragraph 29).
78. In that connection, it must be borne in mind that the deduction system under the Sixth Directive 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, in particular, Case C-408/98 Abbey National  [2001] ECR I-1361, paragraph 24, and Zita Modes , paragraph 38).
79. According to settled case-law, Article 2 of First Council Directive 67/227/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes (OJ, English Special Edition 1967, p. 14) 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 entitlement to deduct is necessary before the taxable person is entitled to deduct input VAT and in order to determine the extent of such entitlement (Case C-98/98 Midland Bank  [2000] ECR I-4177, paragraph 24; Abbey National , paragraph 26; and Case C-16/00 Cibo Participations  [2001] ECR I-6663, paragraph 29).
80. To allow taxable persons to deduct all input VAT even though, in the context of their normal commercial operations, no transactions conforming with the deduction rules of the Sixth Directive or of the national legislation transposing it would have enabled them to deduct such VAT, or would have allowed them to deduct only a part, would be contrary to the principle of fiscal neutrality and, therefore, contrary to the purpose of those rules.
81. As regards the second element, whereby the transactions concerned must essentially seek to obtain a tax advantage, it must be borne in mind that it is the responsibility of the national court to determine the real substance and significance of the transactions concerned. In so doing, it may take account of the purely artificial nature of those transactions and the links of a legal, economic and/or personal nature between the operators involved in the scheme for reduction of the tax burden (see, to that effect, Emsland Stärke , paragraph 58).
82. In any event, it is clear from the order for reference that the VAT and Duties Tribunal considers that the sole purpose of the transactions at issue in the main proceedings was to obtain a tax advantage.
83. Finally, it must be borne in mind that the right of deduction 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. It must be exercised immediately in respect of all the taxes charged on transactions relating to inputs (see, in particular, Case C-62/93 BP Supergas [1995] ECR I-1883, paragraph 18, and Joined Cases C-110/98 to C‑147/98 Gabalfrisa and Others  [2000] ECR I-1577, paragraph 43).
84. However, as the Court has already had occasion to observe, it is only in the absence of fraud or abuse, and subject to adjustments which may be made in accordance with the conditions laid down in Article 20 of the Sixth Directive, that the right to deduct, once it has arisen, is retained (see, in particular, Case C-400/98 Breitshol  [2000] ECR I-4321, paragraph 41, and Case C-396/98 Schlossstraße  [2000] ECR I-4279, paragraph 42).
85. Accordingly, the answer to be given to the second question must be that the Sixth Directive must be interpreted as precluding any right of a taxable person to deduct input VAT where the transactions from which that right derives constitute an abusive practice.
86. For it to be found that an abusive practice exists, it is necessary, first, that the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of the Sixth Directive and of national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions. Second, it must also be apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage.
Question 1(b)
92. It is important, however, to note in that respect that the measures which the Member States may adopt under Article 22(8) of the Sixth Directive in order to ensure the correct levying and collection of the tax and for the prevention of fraud must not go further than is necessary to attain such objectives (see Gabalfrisa and Others, paragraph 52, and the order in Transport Service , paragraph 29). They may not therefore be used in such a way that they would have the effect of undermining the neutrality of VAT, which is a fundamental principle of the common system of VAT established by the relevant Community legislation (see Case C-454/98 Schmeink & Cofreth and Strobel  [2000] ECR I-6973, paragraph 59).
94. It follows that transactions involved in an abusive practice must be redefined so as to re-establish the situation that would have prevailed in the absence of the transactions constituting that abusive practice.
95. In that regard, the tax authorities are entitled to demand, with retroactive effect, repayment of the amounts deducted in relation to each transaction whenever they find that the right to deduct has been exercised abusively ( Fini H , paragraph 33).
98. It follows that the answer to Question 1(b) must be that, where an abusive practice has been found to exist, the transactions involved must be redefined so as to re-establish the situation that would have prevailed in the absence of the transactions constituting that abusive practice.
Costs