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Flashback on ECJ Cases – C-334/10 (X) – Temporary private use does not preclude input tax deduction

On July 19, 2012, the ECJ issued its decision in the case C-334/10 (X).

Context: Sixth VAT Directive — Article 6(2), first subparagraph, (a) and (b), Article 11A(1)(c) and Article 17(2) — Part of a capital item forming part of the assets of a business — Temporary use for private purposes — Permanent alterations to that item — Payment of VAT in respect of the permanent alterations — Right to deduct


Article in the EU VAT Directive

Articles 6(2), 11A(1)(c) and 17(2) of the Sixth VAT Directive (Artciles 26, 75, 168 of the EU VAT Directive 2006/112/EC).

Article 26 (Taxable transaction – Supply of services0
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.

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.


Facts

  • As is apparent from the order for reference, the taxable person is a partnership without legal personality in the form of a commercial partnership composed of two natural persons. In the year 2000, the taxable person ran a wholesale undertaking dealing in car paint. In 1999, the two founders of the taxable person purchased a commercial warehouse which they used immediately for the purposes of their economic activities.
  • At the beginning of 2000 part of the attic of the warehouse was adapted for temporary occupation by the two partners and their children pending completion of a commercial residence adjacent to the warehouse. With that in mind, two dormer windows, a vestibule, a bathroom and a toilet were installed. VAT was charged for that work.
  • For 23 months, during the work and following its conclusion, the taxable person used the attic as a dwelling. Thereafter the attic was adapted for business purposes and used, as envisaged, as an office and instruction area.
  • The taxable person deducted the VAT relating to the costs of the alterations. The Tax Inspectorate took the view that that deduction was incorrect, with the exception of the VAT deducted for the installation of the bathroom and toilet, since the taxable person had demonstrated plausibly that the installation of these two facilities also served the business purposes of the undertaking.
  • The taxable person brought an action against that decision. The first instance court held that the installation of the dormer windows and of a vestibule was carried out purely for the purposes of occupation and that at no time had it been stated or demonstrated plausibly that that work had been carried out for the benefit of the undertaking, with the result that there was no entitlement to a deduction.
  • The same court took the view that the taxable person was not entitled to deduct VAT under Article 17 of the Sixth Directive either, because the installed facilities had not been used for taxable transactions. Furthermore, Article 6(2), first subparagraph, (a), of the Sixth Directive was not applicable on the ground that the alteration work was to be regarded as a supply of a service, and it could not be claimed that, in respect of this service, there had been a ‘use of goods forming part of the assets of a business … for purposes other than those of [the] business’. Lastly, Article 6(2), first subparagraph, (b), of the Sixth Directive was not applicable either, because that provision excludes services not supplied by the taxable person itself.
  • In support of its appeal in cassation before the Hoge Raad der Nederlanden, the taxable person submits that, in the present case, Article 6(2), first subparagraph, (a) or (b), of the Sixth Directive is applicable. In that regard, he states that he temporarily used part of a capital item forming part of the assets of the business for purposes other than those of the business, which therefore constituted a taxable transaction for the purposes of that provision. The taxable amount on that transaction consists of the costs incurred by the taxable person in carrying out the supply of services, including not only the purchase costs but also the costs of maintenance and improvement. Inasmuch as those costs form part of the basis for the levying of VAT on private use, then, under the neutrality principle, not only the VAT levied on the purchase costs but also the VAT levied on the costs of maintenance and improvement are immediately deductible in full.
  • The Hoge Raad der Nederlanden states that, in the present case, it is common ground that, following its purchase, the warehouse was used for business purposes. It is also common ground that, as of a certain point in time, part of that warehouse was used temporarily for private purposes and that — purely with a view to that use — work was carried out on the premises. The parties did not indicate whether the taxable person was charged VAT on the purchase of the warehouse nor did the lower courts come to any conclusion in this regard. The national court concludes that it is necessary to examine both possibilities.

Questions

1.      Regard being had to Article 6(2), first subparagraph, (a) and (b), Article 11A(1)(c) and Article 17(2) of the Sixth Directive, is a taxable person who makes temporary use for private purposes of part of a capital item of his business entitled to deduct the input VAT levied on expenditure incurred in respect of permanent alterations carried out exclusively with a view to that use for private purposes?

2.      For the purpose of answering this question, does it make any difference whether the taxable person was charged VAT, which he deducted, on the acquisition of the capital item?


AG Opinion

A taxable person who makes temporary use for private purposes of part of a capital item of his business is entitled, under Article 17(2) of the Sixth Directive, to deduct the VAT levied on expenditure incurred in respect of permanent alterations carried out exclusively with a view to that use for private purposes and which give rise to a separate capital item, where, at the time when the alterations are made, the taxable person has the intention, corroborated by objective evidence, to use the capital item thereby created for the purposes of his taxable business transactions even if that use is to occur only after the private use. That entitlement to deduct VAT exists irrespective of whether the taxable person was charged VAT, which he deducted, on the acquisition of the capital item to which the alterations were made.


Decision

Article 6(2), first subparagraph, (a) and (b), Article 11A(1)(c) and Article 17(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, as amended by Council Directive 95/7/EC of 10 April 1995, must be interpreted as meaning that, first, a taxable person who makes temporary use for private purposes of part of a capital item forming part of the assets of his business is entitled, under those provisions, to deduct the input value added tax on the expenditure incurred in carrying out permanent alterations to that item even though those alterations were carried out with a view to that temporary use for private purposes and, secondly, that right to deduct exists irrespective of whether the taxable person was charged VAT and deducted that VAT upon the acquisition of the capital item to which those alterations were made.


Summary

A taxpayer who temporarily uses part of an investment good belonging to his business for his own private purposes is entitled to deduct input tax on the costs incurred to make permanent adjustments to that good, even if these adjustments were made with a view to that temporary use has been carried out for private purposes, and this right to deduct also exists irrespective of whether the taxable person has been charged and deducted VAT in respect of the purchase of the investment good to which these adjustments have been made .


Source:


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