Flashback on ECJ cases C-321/02 (Harbs) – Common flat-rate scheme for farmers

On July 15, 2004, the ECJ issued its decision in the case C-321/02 (Harbs).

Context: Sixth VAT Directive – Article 25 – Common flat-rate scheme for farmers – Leasing of part of a farm

Article in the EU VAT Directive

Article 25 of the Sixth VAT Directive (Article 295 of the EU VAT Directive 2006/112/EC).

Article 295
1. For the purposes of this Chapter, the following definitions shall apply:
(1) ‘farmer’ means any taxable person whose activity is carried out in an agricultural, forestry or fisheries undertaking;
(2) ‘agricultural, forestry or fisheries undertaking’ means an undertaking regarded as such by each Member State within the framework of the production activities listed in Annex VII;
(3) ‘flat-rate farmer’ means any farmer covered by the flat-rate scheme provided for in this Chapter;
(4) ‘agricultural products’ means goods produced by an agricultural, forestry or fisheries undertaking in each Member State as a result of the activities listed in Annex VII;
(5) ‘agricultural services’ means services, and in particular those listed in Annex VIII, supplied by a farmer using his labour force or the equipment normally employed in the agricultural, forestry or fisheries undertaking operated by him and normally playing a part in agricultural production;
(6) ‘input VAT charged’ means the amount of the total VAT attaching to the goods and services purchased by all agricultural, forestry and fisheries undertakings of each Member State subject to the flat-rate scheme where such tax would be deductible in accordance with Articles 167, 168 and 169 and Articles 173 to 177 by a farmer subject to the normal VAT arrangements;
(7) ‘flat-rate compensation percentages’ means the percentages fixed by Member States in accordance with Articles 297, 298 and 299 and applied by them in the cases specified in Article 300 in order to enable flat-rate farmers to offset at a fixed rate the input VAT charged;
(8) ‘flat-rate compensation’ means the amount arrived at by applying the flat-rate compensation percentage to the turnover of the flat-rate farmer in the cases specified in Article 300.
2. Where a farmer processes, using means normally employed in an agricultural, forestry or fisheries undertaking, products deriving essentially from his agricultural production, such processing activities shall be treated as agricultural production activities, as listed in Annex VII.

Facts

In 1992, Mr Harbs was the owner of a farm comprising, in addition to land of 92 hectares and farm buildings, livestock of approximately 60 fattening bulls, 65 dairy cows and 120 other cattle. He received a milk reference quantity (milk quota) of 321 367 kg.
By virtue of two agreements of 12 November 1992, Mr Harbs leased part of his farm to his son, for consideration, from 15 November 1992 to 30 June 2005. First, by way of a ‘farm lease’, he leased to his son land of approximately 31 hectares, the 65 milk cows and his milk quota. Secondly, by way of an ‘agreement for the use of animal sheds’, he let to his son a cowshed containing 75 spaces. Mr Harbs continued to farm the rest of his agricultural land.
Mr Harbs took the view that the consideration agreed under the farm lease was taxable at the average rates provided for in Paragraph 24 of the UStG and that, under that paragraph, the tax on the turnover from a farming business is offset by input tax of a corresponding amount, with the result that there is no tax to be levied. He therefore did not declare any taxable turnover for the 1992 financial year in the tax statement of 20 January 1995 which he had been asked to submit.
The Finanzamt considered that, whilst the lease of the land and the building was exempt from tax under German law, the turnover achieved by Mr Harbs in 1992 from the leasing of the milk quota and the dairy cows did not arise from farming within the meaning of Paragraph 24 of the UStG and, accordingly, had to be taxed under the general provisions of the UStG. It therefore charged turnover tax on the net amount of the consideration paid for that lease and, on 10 July 1996, it issued a tax notice for DEM 361.
His objection having been dismissed, Mr Harbs brought an action before the Finanzgericht Schleswig-Holstein (Schleswig-Holstein Finance Court) (Germany), which held the action to be well founded. The Finanzamt appealed on a point of law (‘Revision’) to the Bundesfinanzhof.

Questions

Where the owner of a farm:

– gives up part of his farm (the entire dairy cow operation) and leases the assets necessary for that operation to another farmer;

– and continues to farm on a not insignificant scale after granting the lease,

may he treat the turnover from the lease – like the rest of his turnover – under the flat-rate scheme for farmers (Article 25 of Directive 77/388/EEC), or is the turnover from the lease taxable under the general rules?

AG Opinion

Article 25 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, should be interpreted as meaning that a farmer who has leased out some of the assets of his farm and who continues his agricultural activities on the rest of the farm, activities in respect of which he pays tax under the common flat-rate scheme provided for in that article, may not treat the income from that leasing arrangement as being taxable under that flat-rate scheme. The income from the leasing arrangement must be taxable under the general VAT scheme.

Decision

Article 25 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 is to be interpreted as meaning that a farmer who has leased and/or let on a long-term basis some of the material assets of his farming business but continues to farm with the rest of his assets and who, in respect of the continued farming activity, is subject to the common flat-rate scheme provided for in Article 25 may not treat the income from such a lease and/or letting as being taxable under that scheme. The turnover from that arrangement must be taxed under the normal scheme or, where appropriate, the simplified scheme of value added tax.

Summary

Article 25 of the Sixth Directive must be interpreted as meaning that an agricultural producer who has leased out and/or leased out for a long time part of the substantial elements of his agricultural holding and continues his agricultural activity with the remainder of it, for which he is subject to the is subject to the common flat-rate scheme in Article, cannot bring the turnover from this lease and/or this rental under this flat-rate scheme.

The turnover in question should be taxed under the normal regime or, where appropriate, under the simplified value added tax regime.

Source