Flashback on ECJ Cases – C-392/11 (Field Fisher Waterhouse) – Rental of immovable property and the services associated with this rental can form a single service from a VAT point of view

On September 27, 2012, the ECJ issued its decision in the case C-392/11 (Field Fisher Waterhouse).

Context: VAT – Exemption for leasing of immovable property – Leasing of commercial premises – Services connected with the leasing – Classification of the transaction for VAT purposes – Transaction consisting of a single supply or several independent supplies

Article in the EU VAT Directive

Article 135(1)(l), 137 of the EU VAT Directive 2006/112/EC

Article 135
1. Member States shall exempt the following transactions:

(l) the leasing or letting of immovable property.

Article 137
1. Member States may allow taxable persons a right of option for taxation in respect of the following transactions:
(d) the leasing or letting of immovable property.
2. Member States shall lay down the detailed rules governing exercise of the option under paragraph 1.
Member States may restrict the scope of that right of option.

Facts

FFW is a firm of solicitors which leased offices in London (United Kingdom).
The lease concluded between FFW and the landlord provides that the premises are let in consideration of the payment of three ‘rents’. These correspond, first, to occupation of the premises, secondly, to FFW’s share of the cost of insuring the building and, thirdly, to the provision of services which the landlord is obliged under the lease to provide. This third type of rent consists in charges due in return for supplies of services (‘the service charges’) including among other things the supply of water, heating throughout the building, repair of the structure and machinery of the building (including the lifts), cleaning of the common parts, and the security of the building. The lease provides that if the tenant fails to pay those three rents the landlord can terminate the lease.
According to the referring court, the landlord has not exercised his right to opt for taxation of the leasing of the premises within the meaning of Article 137(1)(d) of the VAT Directive. The lease of the immovable property at issue in the main proceedings is therefore exempt from VAT.
The landlord has also not invoiced VAT on the supplies of services to FFW, as it considers that they too are exempt from VAT.
FFW considers that those supplies of services by the landlord constitute transactions subject to VAT. FFW accordingly made an application to the Commissioners to reclaim the VAT paid in respect of those supplies. The application was rejected by the Commissioners on the principal ground that the lease and the supplies of services in their opinion constituted a single supply which was exempt from VAT, and FFW appealed to the referring court. Before that court, FFW argues that the supplies of services which are the subject of the service charges at issue in the main proceedings must be treated as transactions subject to VAT.

Questions

1. The principal question in the present case is whether the services provided by landlords under a lease agreement with their tenants (“the Services”) should be regarded as an element of a single exempt supply of a lease of land, either because the Services form objectively a single indivisible economic supply together with the lease or because they are “ancillary” to the lease, which forms the principal supply (“the Principal Supply”). In determining this question and in the light of the [Court of Justice’s] decision in Case C‑572/07 [RLRE] Tellmer [Property [2009] ECR I‑4983], how relevant is it that the Services could be (but are not in fact) supplied by persons other than the landlords, albeit under the terms of the present leases in question the tenants had no choice but to receive the services from the landlords?

2. In determining whether there is a single supply, is it relevant that a failure by the tenant to pay the service charge would entitle the landlord not only to refuse to provide the Services but also to terminate the lease agreement with the tenant?

3. If the answer to Question 1 is that the possibility of third parties providing the Services direct to the tenant is relevant, is it merely a contributory factor in determining whether the Services are either a single, indivisible economic supply, which it would be artificial to split or an ancillary supply to the Principal Supply, or is it a determining factor? If it is merely a contributory factor or if it is not relevant at all, what other factors are relevant in determining whether the Services are an ancillary supply? In particular how relevant is it whether the Services are performed in or in respect of the demised premises which are the subject matter of the letting or in other parts of the building?

4. If the possibility of third parties providing the Services is relevant, is more particularly what is relevant whether the Services could as a legal matter be supplied by third parties, even if this would be difficult in practice to organise or agree with the landlord, or is the practical possibility or the common practice in the provision of such services the relevant consideration?

5. The Services in the present case represent a range of services provided in return for a single service charge. In the event that some of these services (e.g. cleaning of common parts, the provision of security services) are not part of a single indivisible economic supply or are to be regarded as ancillary to the Principal Supply, but other services are, would it be correct to apportion the total consideration between the various services in order to determine the portion of the consideration chargeable to tax and that portion not so chargeable? Alternatively would it be correct to regard the range of services provided as so closely linked to each other that they form “a single indivisible economic supply which it would be artificial to split” being of itself a single supply separate from the leasing of property?

AG Opinion

None

Decision

Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that the leasing of immovable property and the supplies of services linked to that leasing, such as those at issue in the main proceedings, may constitute a single supply from the point of view of value added tax. The fact that the lease gives the landlord the right to terminate it if the tenant fails to pay the service charges supports the view that there is a single supply, but does not necessarily constitute the decisive element for the purpose of assessing whether there is such a supply. On the other hand, the fact that services such as those at issue in the main proceedings could in principle be supplied by a third party does not allow the conclusion that they cannot, in the circumstances of the dispute in the main proceedings, constitute a single supply. It is for the referring court to determine whether, in the light of the interpretative guidance provided by the Court in this judgment and having regard to the particular circumstances of the case, the transactions in question are so closely linked to each other that they must be regarded as constituting a single supply of the leasing of immovable property.

Summary

Rental of commercial premises – Services associated with this rental

Rental of immovable property and the services associated with this rental can form a single service for VAT purposes. In this regard, the possibility for the lessor in the lease to terminate it in the event of the lessee’s failure to pay the rental charges constitutes an indication that there is a single service, although this possibility is not necessarily decisive for the assessment of whether there is such service. On the other hand, the fact that a third party may, in principle, provide services such as those at issue in the main proceedings cannot lead to the conclusion that those services cannot constitute a single service.

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