The European Court of Justice (First Chamber) ruled that art. 11(A)(1)(c) of Council Directive 77/388 (‘the sixth directive’) did not preclude the taxable amount for VAT in respect of the private use of part of a building treated by a taxable person as forming part of the assets of his business from being fixed at a portion of the acquisition or construction costs of the building, established in accordance with the length of the period for adjustment of deductions concerning VAT provided for in art. 20 of the directive. That taxable amount had to include the costs of acquiring the land on which the building was constructed when that acquisition had been subject to VAT and the taxable person had deducted that tax.

Facts

In 2003, the taxpayer household had a building constructed which was to form in its entirety part of the assets of its business. That building comprised the privately used rooms of the two members of the household and the rooms of a tax adviser's office which were let to one of those members. The part which was let constituted 20.33 per cent of the building. That letting was subject to VAT.

In its provisional VAT returns for December 2003 and for January to March 2004, the taxpayer deducted the entire VAT charged to it in connection with the costs of constructing the building. Relying on the rate of depreciation for wear and tear of buildings as laid down under national law, it considered that the taxable amount for the private use of 79.67 per cent of the building was a monthly amount equal to 1/12th of two per cent of the construction costs apportionable to the privately used part of the building.

Relying on a circular of the German Ministry of Finance, the tax office took the view that the taxable amount should be established by reference to the length of the period of adjustment for deductions concerning VAT under national law, namely 10 years. It therefore corrected the taxpayer's calculation and fixed the taxable amount per month for VAT in respect of the private use of part of the building at 1/12th of 10 per cent of the construction costs apportionable to that part.

The taxpayer challenged that decision before the finance court which took the view that a decision depended on determining the taxable amount relating to the private use of a building which had been allocated, in its entirety, to the household's business. Observing that art. 11(A)(1)(c) of the sixth directive did not define the concept of ‘full cost’, it was unsure of the meaning to be given to that concept and made a reference to the European Court of Justice for a preliminary ruling.

Issue

Whether for the purposes of art. 11(A)(1)(c) the ‘full cost’ for the privately used dwelling in a building forming, in its entirety, part of the assets of a business comprised, in addition to recurring expenses, annual depreciation for the wear and tear of buildings in accordance with the applicable national rules and/or the annual proportion of the acquisition and production cost (calculated on the basis of the applicable national period for adjustment of deductions) that had given rise to a right to deduct VAT.

Decision

The European Court of Justice (First Chamber) (ruling accordingly) said that the purpose of art. 11(A)(1)(c) 2 October 2006 was to define the taxable amount of private use or, more generally, of use for purposes other than those of the business of goods forming part of the assets of a taxable person's business, as art. 6(2)(a) treated such use as a supply of services for consideration which was therefore subject to VAT. The purpose of that treatment was to prevent a taxable person who was able to deduct VAT on the acquisition or construction of goods forming part of the assets of his business from avoiding payment of that tax when he used those goods or a part thereof for private purposes.

The purpose of that device was, first, to ensure equal treatment as between a taxable person and a final consumer by preventing the former from enjoying an advantage to which he was not entitled by comparison with the latter who bought the goods and paid VAT on them. Secondly, the aim was to ensure, in accordance with the underlying purpose of the system introduced by the sixth directive, a correspondence between deduction of input VAT and charging of output VAT. Although its scope was not exactly the same as that of art. 6(2)(a), the system of adjustment of deductions introduced by art. 20 applied, like art. 6(2)(a), in situations where goods, the use of which was eligible for deduction, were then put to a use which was not eligible for deduction. Both art. 6(2) and art. 20 related to situations in which goods were used simultaneously for business and for private purposes.

Furthermore, the aim of the system of adjustment was analogous to that of the levying of VAT on the private use of immovable property. It was a matter, first, of avoiding giving an unjustified economic advantage to a taxable person by comparison with a final consumer, by obliging the taxable person to pay amounts equivalent to the deductions to which he was not entitled. Further, it was a matter of ensuring a correspondence between deduction of input tax and charging of output tax. Taking into account that common aim, as well as the additional role assumed for that purpose by art. 6 and 20 in the scheme of the sixth directive, a member state did not misconstrue the discretion which it enjoyed in providing that the rules relating to the adjustment of deductions applied for the purposes of establishing the taxable amount for the private use of business goods. That approach also contributed to reducing the cash-flow advantage which the levying of VAT in instalments gave a taxable person using business property for private purposes by comparison with the final consumer who had to pay the whole of the VAT on acquiring or constructing such a building.

Furthermore, that approach would make it possible to preclude cases of untaxed end use in the event that the building was transferred free of VAT at the end of the period for adjustment of deductions. By spreading the levying of the VAT for the private use of the building in question over the duration of that period, it ensured, as regards that use, that the total amount of tax corresponding to the deduction of input tax was levied before a possible resale of the building exempt from VAT took place at the end of that period.

In the case of Seeling v Finanzamt Sternberg (Case C-269/00) [2003] BTC 5,343; [2003] ECR I-4101, the ECJ had found that the length of the period for adjustment provided for in art. 20 was able to preclude cases of untaxed end use to a limited extent in situations where the levying of VAT in instalments for the private use of business property was permitted over a longer period than that of the period for adjustment. That finding could not, however, be read as depriving the member states of the discretionary power of using a method to establish the taxable amount for such private use which, like that of spreading the levying over a period corresponding to that of the period for adjustment of deductions, made it possible to avoid as far as possible, in the interests of equality between taxable persons and final consumers, cases of untaxed end use where assets were transferred free of VAT by taxable persons.

In a case where the costs of acquiring land on which a building partly used for private purposes had been erected had been subject to VAT and, having treated that land as forming part of the assets of his business, the taxable person had deducted that tax, those costs had to be included in the taxable amount for VAT in respect of that private use. First, the concept of the full cost to the taxable person of providing the services within the meaning of art. 11(A)(1)(c) covered all expenses incurred to that end, including those connected with the acquisition of the land without which the private use in question could not have taken place. Secondly, the exclusion from the taxable amount for VAT of the costs of acquiring the land which gave rise to entitlement to deduct VAT would upset the correspondence between deduction of input VAT and charging of output VAT.

In the circumstances it was for the national court to assess whether the applicant's acquisition of the land on which it erected the building at issue was subject to VAT and whether the applicant deducted that tax.

European Court of Justice (First Chamber). Judgment delivered
14 September 2006.