Flashback on ECJ cases C-25/03 (HE) – Purchase of a house, of which one room is an office, is an economic activity

On April 21, 2005, the ECJ issued its decision in the case C-25/03 (HE).

Context: Sixth VAT Directive – Construction of a dwelling by two spouses forming a community which does not itself perform an economic activity – Use of one room by one of the co-owners for business purposes – Status of taxable person – Right to deduct – Rules governing exercise of that right – Invoicing requirements.

Article in the EU VAT Directive

Articles 18(1)(a) and 22(3) of the Sixth VAT Directive (Articles 178(a) and

Article 178 (Rules governing exercise of the right of deduction)
In order to exercise the right of deduction, a taxable person must meet the following conditions:
(a) for the purposes of deductions pursuant to Article 168(a), in respect of the supply of goods or services, he must hold an invoice drawn up in accordance with Sections 3 to 6 of Chapter 3 of Title XI;

Article 220 (Issue of invoices)
1. Every taxable person shall ensure that, in respect of the following, an invoice is issued, either by himself or by his customer or, in his name and on his behalf, by a third party:
(1) supplies of goods or services which he has made to another taxable person or to a non-taxable legal person;
(2) supplies of goods as referred to in point (a) of Article 33 except where a taxable person is making use of the special scheme in Section 3 of Chapter 6 of Title XII;
(3) supplies of goods carried out in accordance with the conditions specified in Article 138;
(4) any payment on account made to him before one of the supplies of goods referred to in points (1) and (2) was carried out;
(5) any payment on account made to him by another taxable person or non-taxable legal person before the provision of services was completed.
2. By way of derogation from paragraph 1, and without prejudice to Article 221(2), the issue of an invoice shall not be required in respect of supplies of services exempted under points (a) to (g) of Article 135(1).

Facts

It appears from the case-file in the main proceedings that during 1990 HE and his spouse acquired co-ownership of a plot of land. Ownership was shared as to one quarter for the husband and three quarters for his spouse. The spouses subsequently commissioned various undertakings to construct a dwelling on their plot of land. At the hearing before the Court, HE’s lawyer stated that ownership of the building was likewise shared as to one quarter for the husband and three quarters for the spouse. All the invoices relating to construction were addressed to Mr and Mrs HE and made no distinction by reference to the share of each of the co-owners.
It is not disputed that HE used one room in that house as an office in order to pursue, in parallel with his paid employment, an ancillary activity as a specialist writer.
In his VAT returns for the period covering the tax years 1991, 1992 and 1993, HE deducted, on the basis of the invoices relating to construction of the building, proportionate amounts in respect of which he took the deductible proportion to be 12%, corresponding to the ratio between the area of the office and the total living area of the house.
The Tax Office refused those deductions, however, on the ground that the owner of the building and the recipient of the construction services was the community comprising both spouses and not HE alone.
HE’s appeal against the decision refusing to allow the deductions succeeded in part at first instance before the Finanzgericht (Finance Court).
According to that court, as a matter of civil law HE was the customer and recipient of the construction work attributable to the office only in respect of one quarter. In the absence of any other factors, the court based its finding on the division as between the spouses of ownership of the building. In view of the fact that his spouse owned a three-quarter share, the Finanzgericht found that HE was entitled to deduct input VAT attributable to the office only to the extent of one quarter, in other words one quarter of 12% of the total input tax. In that court’s view, the fact that the invoices were made out to both spouses without differentiating between them was immaterial in that context.
Both the Tax Office and HE appealed on a point of law against the judgment to the Bundesfinanzhof.
The Tax Office maintains that a distinction must be drawn according to whether the supplies at issue in the main proceedings were made to the community formed by the spouses or to just one of the co-owners. If the identity of the customer is not clear from the order made for the work, the community is deemed to be the recipient of the work. The way in which ownership of the building is shared between HE and his spouse is irrelevant in this regard. In any event, the fact that there was no apportionment of the input VAT between the spouses and the fact that the invoices were issued to both spouses without distinction between them preclude HE from any entitlement to deduction.
By contrast, HE submits that since he alone has a right of user over the part of the building used as an office, he must be regarded as the sole customer so far as the construction work in relation to that part of the building is concerned. In his submission, to refuse the deduction purely on the basis of national civil law is incompatible with the common system of VAT. Contrary to the finding of the court at first instance, the right to deduct should extend to all the VAT relating to construction of the office, that is to say 12% of all the VAT relating to the house.
The Bundesfinanzhof notes that, under German law, when an order is placed by a number of persons acting not as an autonomous legal person – a partnership or company – but simply as a de facto community, each member of the community is the recipient of the supply to the extent of the proportion stipulated as his. For the purposes of VAT, in the case at issue in the main proceedings the community as such did not act and therefore the two spouses must be regarded as the recipients of the supply concerned.
The Bundesfinanzhof also notes that, according to the findings of the Finanzgericht, only HE carried on a business activity in the office located in the building which the spouses had jointly built. Under its case-law, where property is acquired in common, each party who has acquired an asset in order to use it for business purposes is entitled to make a deduction not exceeding his interest in the community. In a case in which spouses had rented business premises but only one spouse used the premises for business purposes, the Bundesfinanzhof relied, in the absence of any other factors, on Paragraph 742 of the German Civil Code (Bürgerliches Gesetzbuch), under which the rights and obligations are to be divided as to half between the members of the community, and consequently held that the member using the asset for business purposes was entitled to deduct only to the extent of one half of the total input tax.
That was also the conclusion reached in this instance by the Finanzgericht, which rightly held that that reasoning was not called into question by the fact that the invoices had been made out to the two spouses.
The Bundesfinanzhof is none the less in doubt as to whether that result is compatible with the Sixth Directive.
First of all, it observes, it is not possible to conclude with certainty either that the supplies relating to the construction of a residential building, in which an office has been fitted out, were obtained by HE ‘as a taxable person’ and ‘for the purposes of his taxable transactions’ within the meaning of Article 17(2) of the Sixth Directive, or that they were obtained for private residential purposes, a fortiori because, for example, the Austrian authorities exclude the right to deduct in such a case.
In that context, it is also necessary to ascertain whether or not expenditure on the construction of a home office is ‘strictly business expenditure’: if not, it is itself ineligible for deduction by virtue of the second sentence of Article 17(6) of the Sixth Directive.
If there is in principle a right to deduct in such a case, it is then necessary to decide how that right is to be exercised under Community law where a community by undivided shares or a marital community, which does not itself act as a taxable person, acquires a capital item.
Finally, there is some doubt as to how the conditions set out in Articles 18(1)(a) and 22(3)(a) and (c) of the Sixth Directive should be applied, in the light of national case-law according to which the requirements relating to the additional particulars to be given on the invoice as regards the respective shares are of little importance.

Questions

(1) Is a person who purchases or builds a house for his own residential purposes acting as a taxable person in the purchasing or building of that residence if he intends to use one of its rooms as a “home office” for engaging in an ancillary activity as a self-employed person?

(2) If Question 1 is answered in the affirmative:

Where a community by undivided shares or a marital community which does not itself operate as a business places an order in common for a capital item, should it be assumed that the purchase concerned is made by a non-taxable person who is not entitled to deduct the value added tax charged on the purchase as input tax, or are the members of that community the recipients of the transaction?

(3) If Question 2 is answered in the affirmative:

Where spouses in a community by undivided shares purchase a capital item but that item is used by only one of them for the purposes of his business:

(a) is that spouse entitled to effect only a pro rata deduction in respect of the input tax attributable to his share as purchaser, or

(b) is that spouse entitled under Article 17(2)(a) of the Sixth Directive to deduct as input tax the proportion attributable to his business use of the item as a whole (subject to the invoicing requirements set out in Question 4)?

(4) For that spouse/co-owner to exercise his right to deduct in accordance with Article 18 of the Sixth Directive, must he hold an invoice, as provided for under Article 22(3) of the directive, which has been issued to him alone and states the proportion of the payments and corresponding tax attributable to him, or is it sufficient for the spouses/co-owners to be issued with the invoice without any such apportionment of the amounts due?

AG Opinion

(1) A person who engages in an ancillary activity as a self-employed person, within the meaning of Article 4 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, is acting as a taxable person when he builds or purchases a building for residential purposes if he sets aside and uses a part of that building for the purposes of his business.

(2) When persons forming a community, by operation of law or voluntarily, which does not have legal personality and does not itself exercise any independent economic activity, order a capital item, the recipients of the supply within the meaning of the Sixth Directive are the individual members and not the community itself.

(3) A taxable person who purchases a property in co-ownership with his spouse and uses it in part for the purposes of his own independent business is entitled, under Article 17(2)(a) of the Sixth Directive, to deduct from the VAT for which he is liable the proportion of the VAT paid for the purchase of the part of the property used for business purposes which corresponds to his share of ownership.

(4) Articles 18(1) and 22(3) of the Sixth Directive do not require that, in order to exercise the right to deduct referred to in Article 17(2)(a) of that directive, a taxable person who builds or purchases a capital item in co‑ownership with his spouse, using a part thereof in the exercise of his business as a self-employed person, must hold an invoice issued to him which indicates the proportion of the price and tax that corresponds to his share of ownership.

Decision

1. 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, both in its original version and following amendment by Council Directive 91/680/EEC of 16 December 1991 supplementing the common system of value added tax and amending Directive 77/388/EEC with a view to the abolition of fiscal frontiers, is to be interpreted as follows:

– where a person purchases a house, or has a house built, in order to live in it with his family he is acting as a taxable person, and is thus entitled to make deductions under Article 17 of the Sixth Directive in so far as he uses one room in that building as an office for the purposes of carrying out an economic activity, albeit an ancillary one, within the meaning of Articles 2 and 4 of the directive and allocates that part of the building to the assets of his business;

– where a marital community which does not have legal personality and does not itself carry out an economic activity within the meaning of the Sixth Directive places an order for a capital item, the co-owners forming that community are to be regarded as recipients of the transaction for the purposes of the directive;

– where spouses forming a community by marriage purchase a capital item, part of which is used exclusively for business purposes by one of the co-owning spouses, that spouse is entitled to deduct in respect of all the input value added tax attributable to the share of the item which he uses for the purposes of his business, in so far as the amount deducted does not exceed the limits of the taxable person’s interest in the co-ownership of the item;

– Articles 18(1)(a) and 22(3) of the Sixth Directive do not require the taxable person, in order to be able to exercise the right to deduct in circumstances such as those at issue in the main proceedings, to hold an invoice issued in his name and stating the proportions of the payments and value added tax corresponding to his interest in the property held in co-ownership. An invoice issued to the co-owning spouses without distinguishing between them and without reference to such apportionment is sufficient for that purpose.

Summary

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