Flashback on ECJ cases C-434/03 (Charles and Charles-Tijmens) – If the taxpayer chooses to treat capital goods used for both business and private purposes as business goods, input VAT is immediately deductible in full

On July 14, 2005, the ECJ issued its decision in the case C-434/03 (Charles and Charles-Tijmens).

Context: Sixth VAT directive – Deduction of input tax paid – Immovable property used in part for the business and in part for private purposes.

Article in the EU VAT Directive

Artciles 6(2), 17(2), 17(6) of the Sixth VAT Directive (Articles 26, 168 and 176 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 168 (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 176 (Restrictions on the right of deduction)
The Council, acting unanimously on a proposal from the Commission, shall determine the expenditure in respect of which VAT shall not be deductible. VAT shall in no circumstances be deductible in respect of expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment.
Pending the entry into force of the provisions referred to in the first paragraph, Member States may retain all the exclusions provided for under their national laws at 1 January 1979 or, in the case of the Member States which acceded to the Community after that date, on the date of their accession.

Facts

According to the order for reference, Mr Charles and Mrs Charles-Tijmens jointly purchased a holiday bungalow in the Netherlands in March 1997. It was intended both for letting and for private use, and during the period at issue in the main proceedings, namely from 1 April to 30 June 1997 inclusive, the bungalow was so used, to the extent of 87.5% of the time for letting and 12.5% for private purposes.
The Hoge Raad der Nederlanden notes that, on account of that letting, Mr Charles and Mrs Charles-Tijmens are taxable persons within the meaning of the Sixth Directive and traders within the meaning of the Law on VAT. Given that the bungalow is let to persons who stay only for very short periods and that the letting is done through a ‘holiday undertaking’, such a letting does not fall within the VAT exemption in the Netherlands for the letting of immovable property under Article 13B(b)(1) of the Sixth Directive.
In their VAT declaration for the second quarter of 1997, Mr Charles and Mrs Charles-Tijmens deducted 87.5% of the tax invoiced to them in respect of the bungalow. Consequently they sought a refund of the amount corresponding to that percentage from the inspector of taxes competent to entertain the application (‘the inspector of taxes’).
By decision of 1 October 1997, the latter granted Mr Charles and Mrs Charles-Tijmens the refund they had requested. Nevertheless, taking the view that the VAT paid by them was 100% deductible, they submitted an application for the additional refund of the amount relating to the 12.5% of the time that the bungalow was used for private purposes.
The inspector of taxes declared that that application was inadmissible. Mr Charles and Mrs Charles-Tijmens therefore brought an appeal before the Gerechtshof te ’s-Hertogenbosch. That court set aside the decision on inadmissibility but, on the substance, it confirmed the decision of the inspector of taxes, stating that since the bungalow was occupied for private purposes for 12.5% of the total time it was used, the persons concerned were not justified in deducting the entire VAT paid in respect of the bungalow.
Mr Charles and Mrs Charles-Tijmens appealed against the judgment of the Gerechtshof te ’s-Hertogenbosch before the Hoge Raad der Nederlanden. In support of their appeal, they claim that it follows from Article 6(2) of the Sixth Directive that the private use of the bungalow is a taxable transaction since they chose to allocate the bungalow wholly to the assets of the business, which, in accordance with Article 17(2) of that directive, confers entitlement to deduct the entire VAT charged in that respect (see, in particular, Case C-291/92 Armbrecht [1995] ECR I-2775, and Case C-415/98 Bakcsi [2001] ECR I-1831).
Mr Charles and Mrs Charles-Tijmens add that Article 17(6) of the Sixth Directive does not alter that interpretation because, on the date on which the Sixth Directive came into force, the Netherlands legislation did not provide for any exclusion from the right to deduct within the meaning of that provision, except for vehicles designed for the transport of people.
The Hoge Raad der Nederlanden notes that the Netherlands rules concerning goods and services allocated for mixed use such as those at issue in the main proceedings were introduced in the Netherlands in 1969, pursuant to Article 11(1) of Second Council Directive 67/228/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes – Structure and procedures for application of the common system of value added tax (OJ, English Special Edition 1967, p. 16; ‘the Second Directive’).
Those rules have a different effect from the rules in the Sixth Directive, which in some cases is more favourable for the taxable person and in others less favourable. That directive confers on the taxable person a right to immediate deduction in full, and there is no adjustment in respect of the private use of goods outside the business until such use takes place. On the other hand, under the system set up by the Law on VAT, the extent of future use of goods outside the business must be established straight away, or at least within the course of the first year.
The Hoge Raad der Nederlanden states in that regard that Article 12(3) of the implementing regulation of 1968 concerning turnover tax (Uitvoeringsbeschikking omzetbelasting 1968, Stcrt. 1968, No 169), adopted pursuant to Article 15(6) of the Law on VAT, provides that, at the time when the declaration relating to the final tax period of a given tax year is made, the VAT deducted is to be recalculated on the basis of the data for the entire tax year. No recalculation or revision of that deduction may be made after that tax year.

Questions

Is a statutory scheme … which was already in existence before the Sixth Directive … and under which:

there is no possibility of choosing to include capital goods, or goods or a service treated as such, wholly in the assets of an undertaking where the acquirer uses those goods or that service both within his undertakings and outside it (in particular for private purposes);
there is, related to this, also no possibility of deducting directly and wholly the tax charged on the acquisition of those goods or that service; and
there is no provision for the charging of VAT as intended in Article 6(2)(a) of the Sixth Directive

compatible with the Sixth Directive – in particular Article 17(1), (2) and (6) and Article 6(2) thereof?

AG Opinion

National legislation which does not allow a taxable person to choose to include capital goods wholly in the assets of his business where he uses those goods both within the business and outside it, in particular for private purposes, is neither compatible with Article 6(2) of 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 – nor capable of falling within the scope of the derogation provided for in the last sentence of that provision.

National legislation which treats the use of such goods as not being a supply for consideration, and thus as falling outside the scope of VAT, may however fall within the scope of that derogation, provided that it does not give rise to any distortion of competition and that it is used in conjunction with the adjustment mechanism provided for in Article 20 of the Sixth Directive.

National legislation, in existence when the Sixth Directive came into force, which provides for a general exclusion from the right of deduction in respect of all goods and services used for non-business purposes does not come within the scope of the second subparagraph of Article 17(6) of that directive.

Decision

Article 6(2) and Article 17(2) and (6) of 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, must be interpreted as precluding national legislation such as that at issue in the main proceedings, adopted before that directive came into force, which does not make it possible for a taxable person to allocate capital goods used in part for business purposes and in part for purposes other than those of his business wholly to his business and, where appropriate, to deduct immediately and in full the value added tax due on the acquisition of those goods.

Summary

Real estate used partly for business and partly for private purposes – Deduction of input tax

Articles 6(2) and 17(2) and (6) of the Sixth Directive must be interpreted as precluding national legislation, such as that at issue in the main proceedings, which was adopted before the entry into force of that directive Directive has been adopted, and which does not allow a taxable person to allocate in its entirety an investment good that is partly used for business purposes and partly for other purposes to his business and, where appropriate, to deduct in full and immediately the VAT due on the purchase of that good.

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