Flashback on ECJ Cases – C-594/10 (van Laarhoven) – Conclusion on VAT flat rate and private use of a car

On February 16, 2012, the ECJ issued its decision in the case C-594/10 (van Laarhoven).

Context: (Sixth VAT Directive — Right to deduct input tax — Limitation — Use of goods forming part of the assets of a business for the private use of the taxable person — Fiscal treatment of private use of goods that are assets of the business

Article in the EU VAT Directive

Articles 6(2)(a), 11A(1)(c) of the Sixth VAT Directive (Articles 26 and 75 of the EU VAT Directive 2006/112/EC).

Article 26 (Taxable transaction – Supply of services)
1. Each of the following transactions shall be treated as a supply of services for consideration:
(a) the use of goods forming part of the assets of a business for the private use of a taxable person or of his staff or, more generally, for purposes other than those of his business, where the VAT on such goods was wholly or partly deductible;
(b) the supply of services carried out free of charge by a taxable person for his private use or for that of his staff or, more generally, for purposes other than those of his business.
2. Member States may derogate from paragraph 1, provided that such derogation does not lead to distortion of competition.

Article 75 (Taxable amount)
In respect of the supply of services, as referred to in Article 26, where goods forming part of the assets of a business are used for private purposes or services are carried out free of charge, the taxable amount shall be the full cost to the taxable person of providing the services.

Facts

Mr van Laarhoven is the sole proprietor of a tax consultancy. In 2006 two passenger vehicles successively formed part of the assets of the business. Mr van Laarhoven used the two vehicles for both business and private purposes.
During that year Mr van Laarhoven drove the vehicles more than 500 kilometres for private purposes. In his VAT return for the period 1 October until 31 December 2006 he declared, as regards that private use and taking account of Article 15 of the Decree relating to VAT, EUR 538 owed in respect of that tax and he paid that tax.
However, Mr van Laarhoven lodged an objection seeking to obtain repayment of that amount. Since that objection was dismissed by order of the Inspector, he brought an appeal before the Rechtbank te Breda against that order. As the Rechtbank te Breda declared the appeal unfounded by judgment of 3 March 2008, Mr van Laarhoven brought an appeal in cassation against that judgment before the Hoge Raad der Nederlanden.
The latter court, referring to Article 17(6) of the Sixth Directive, considers that the Kingdom of the Netherlands had adopted fiscal legislation which limited the VAT deduction for passenger vehicles used by a person for purposes other than those of his business. That legislation, set out in Article 15(6) of the Law on VAT, read together with Article 15(1) of the Decree relating to VAT, provides that VAT on the acquisition of such vehicles is initially deducted as if they were used exclusively for business purposes. Subsequently, the person is annually liable for an amount of VAT on such private use. That amount is calculated on the basis of a fixed percentage of a flat-rate amount of costs which, for income tax purposes, are deemed not to have been incurred for the business. That flat-rate amount is itself fixed on the basis of a percentage of the list price or the value of each vehicle.
The referring court also states that some amendments were adopted after the entry into force of the Sixth Directive, which amended Article 15(1) of the Decree relating to VAT. First, the fixed percentage mentioned above was amended several times and, second, the amount of the reduction to which that fixed percentage is applied was raised. Those amendments to that Decree have generally had an adverse effect on the taxable person as regards the amount considered for deduction as private use of a vehicle forming part of the assets of the business, and as a consequence, on the amount of the VAT deduction.

Questions

1. Does the second subparagraph of Article 17(6) of the Sixth Directive preclude amendments to deduction-limiting legislation such as that in question, according to which a Member State has sought to take advantage of the possibility, for which that provision provides, of (retaining) the exclusion of deduction in respect of certain goods and services if, as a consequence of those amendments, the amount excluded from deduction has been increased in most cases, but the approach and scheme of the deduction-limiting legislation have remained unchanged?

2. If the answer to the first question is in the affirmative, should the national courts refrain from applying the deduction-limiting legislation as a whole, or is it sufficient for them to refrain from applying the legislation to the extent that it has increased the scale of the exclusion or restriction existing at the time when the Sixth Directive entered into force?

AG Opinion

(1) The second paragraph of Article 17(6) of the Sixth Directive precludes amendments made to legislation already existing at the time of the entry into force of the directive,

– which limit the deduction as regards certain company assets for mixed use by authorising, first, the immediate and full deduction, but only making it definitive in part, as VAT is imposed subsequently on private use,

– where the amount of the definitive deduction which is excluded was increased in most cases by the amendments, but the logic and scheme of the rules remained unchanged,

only if (and to the extent that) the supplementary limitation goes beyond that which is necessary for the purposes of an appropriate application of VAT to private use.

(2) If the supplementary limitation to the right to deduct which was introduced by the amendments to the national legislation goes beyond that which is necessary for the purposes of the appropriate application of VAT to private use, with the result that in that regard the amended legalisation no longer falls within the second paragraph of Article 17(6) of the Sixth Directive, the national courts must apply that legislation only to the extent necessary for the purposes of that taxation. A complete non-application of the new and/or previous legislation, with the result that the private use remains free from VAT, is not compatible with the Sixth Directive.

Decision

Article 6(2)(a) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, as amended by Council Directive 95/7/EC of 10 April 1995, read together with Article 11A(1)(c) of the same directive, must be interpreted as precluding national fiscal legislation which initially authorises a taxable person whose passenger vehicles are used for both business and private purposes to deduct input value added tax immediately and in full, but which subsequently provides, as regards private use of those vehicles, for annual taxation based — for determining the taxable amount of value added tax owed in a given financial year — on a flat-rate method of calculating expenses relating to such use which does not take account on a proportional basis of the actual extent of that private use.

Summary

Not permitted is a national tax scheme under which a taxable person whose cars are used for both business and private purposes may first immediately and fully deduct the input tax, but which subsequently provides for an annual tax on the private use of these cars which , for the purpose of determining the taxable amount for VAT in a given assessment year, is based on a flat-rate calculation method for the expenditure associated with such use, which does not take proportional account of the actual amount of that use.

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