Flashback on ECJ Cases C-408/98 (Abbey National plc) – Costs of the transferor for the services related to TOGC form are directly and immediately related to the entire economic activity

On February 22, 2001, the ECJ issued its decision in the case C-408/98 (Abbey National plc).

Context: VAT – Articles 5(8) and 17(2)(a) and (5) of the Sixth VAT Directive – Transfer of a totality of assets – Deduction of input tax on services used by the transferor for the purposes of the transfer – Goods and services used for the purposes of the taxable person’s taxable transactions

Article in the EU VAT Directive

Articles 5(8), 17(2)(a) and 17(5) of the Sicth VAT Directive. Articles 19, 168 and 173 of the EU VAT Directive 2006/112/EC.

Article 19 (Taxable transaction – Supply of Goods)
In the event of a transfer, whether for consideration or not or as a contribution to a company, of a totality of assets or part thereof, Member States may consider that no supply of goods has taken place and that the person to whom the goods are transferred is to be treated as the successor to the transferor.
Member States may, in cases where the recipient is not wholly liable to tax, take the measures necessary to prevent distortion of competition. They may also adopt any measures needed to prevent tax evasion or avoidance through the use of this Article.

Article 168 (Right to deduct VAT – Origin and scope of right of deduction)
In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay:
(a) the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person;
(b) the VAT due in respect of transactions treated as supplies of goods or services pursuant to Article 18(a) and Article 27;
(c) the VAT due in respect of intra-Community acquisitions of goods pursuant to Article 2(1)(b)(i);
(d) the VAT due on transactions treated as intra-Community acquisitions in accordance with Articles 21 and 22;
(e) the VAT due or paid in respect of the importation of goods into that Member State.

Article 173 (Proportional deduction)
1. In the case of goods or services used by a taxable person both for transactions in respect of which VAT is deductible pursuant to Articles 168, 169 and 170, and for transactions in respect of which VAT is not deductible, only such proportion of the VAT as is attributable to the former transactions shall be deductible.
The deductible proportion shall be determined, in accordance with Articles 174 and 175, for all the transactions carried out by the taxable person.
2. Member States may take the following measures:
(a) authorise the taxable person to determine a proportion for each sector of his business, provided that separate accounts are kept for each sector;
(b) require the taxable person to determine a proportion for each sector of his business and to keep separate accounts for each sector;
(c) authorise or require the taxable person to make the deduction on the basis of the use made of all or part of the goods and services;
(d) authorise or require the taxable person to make the deduction in accordance with the rule laid down in the first subparagraph of paragraph 1, in respect of all goods and services used for all transactions referred to therein;
(e) provide that, where the VAT which is not deductible by the taxable person is insignificant, it is to be treated as nil.

Facts

Scottish Mutual Assurance plc (‘Scottish Mutual), a life assurance company, is a 100% subsidiary of Abbey National, which represents it for VAT purposes.
In addition to its insurance business, Scottish Mutual carries on a business leasing premises for professional or commercial use. As part of that activity, it held a 125-year lease of Atholl House, Aberdeen, a building for professional and commercial use which it sublet to commercial tenants. Scottish Mutual had opted to charge VAT on the rent it received for Atholl House, in accordance with the United Kingdom legislation transposing Article 13C(a) of the Sixth Directive, and was thus able to recover all the input VAT paid on the costs connected with ownership of the building.
By a contract of 16 December 1992, Scottish Mutual sold its rights under the 125-year lease and its rights in the sub-lease for GBP 5 400 000 to a company not belonging to the same group. The Commissioners considered that the sale constituted a transfer as a going concern within the meaning of Regulation 5(1) of the VAT Order, that the other conditions in that regulation were satisfied, and that no VAT was therefore due on the sale price.
However, in order to effect the transfer, Scottish Mutual used various services and thus incurred professional fees, on which it had to pay GBP 4 365 as VAT.
The Commissioners considered that only part of the input VAT paid on those costs could be recovered. Abbey National, which contended that it was entitled to recover all the VAT, applied to the VAT and Duties Tribunal in London. That application was dismissed by decision of 9 June 1997. Abbey National then appealed to the High Court of Justice.

Questions

1. Having regard to the terms of Article 17(2) of the Sixth VAT Directive, do the words in Article 5(8) thereof the recipient shall be treated as the successor to the transferor require that the recipient’s supplies should be treated as if they had been made by the transferor, for the purpose of determining the transferor’s input tax deduction?

2. In the event of a transfer … of a totality of assets or part thereof within Article 5(8) of the Sixth VAT Directive, where the Member State, by virtue of national measures adopted pursuant to that article, considers that no supply of goods or services has taken place, may the taxpayer, upon the proper interpretation of Articles 5(8) and 17(2), deduct the whole of the input tax in respect of costs attributable to the transfer, if the taxpayer would, apart from the application of Article 5(8), be obliged to account for output tax on the transfer?

3. Where the economic activity of the transferor prior to the transaction falling within Article 5(8) has been fully taxable, is input tax deductible in respect of a payment made in connection with the termination of that activity?

AG Opinion

Where a Member State has made use of the option in Articles 5(8) and 6(5) of the Sixth VAT Directive, so that a transfer of a totality of assets or part thereof is treated as not being a supply of goods or services, VAT on supplies received in order to make that transfer is deductible by the transferor:

– in full where the assets are those of a business making only taxable supplies;

– in accordance with Articles 17(5) and 19 of the directive where the assets are those of a business making both taxable and exempt supplies.

Decision

– in full where the assets are those of a business making only taxable supplies;

– in accordance with Articles 17(5) and 19 of the directive where the assets are those of a business making both taxable and exempt supplies.

Summary

Where a Member State has made use of the option provided for in Article 5(8) of the Sixth Directive, so that the transfer of all or part of a generality of goods is regarded as not constituting a supply of goods, the expenditure of the transferor for the services used for the purpose of this transfer form part of the general costs of that taxable person and are therefore, in principle, directly and immediately related to the entire economic activity of the taxable person. Consequently, if the transferor carries out both transactions for which there is a right to deduct and transactions for which there is no right to deduct, under Article 17(5) of the Sixth Directive, the transferor may only deduct that part of the VAT which is proportional to the amount of the first-mentioned actions.

Source