Flashback on ECJ cases C-4/94 (BLP Group) – No input VAT deduction on exempt transaction, even if ultimately a taxable transaction is carried out

On April 6, 1995, the ECJ issued its decision in the case C-4/94 (BLP Group).

Context: Value added tax – Interpretation of Article 2 of Directive 67/227/EEC and Article 17 (2) of Directive 77/388/EEC – Deduction of input tax on goods or services relating to exempt transactions.

Article in the EU VAT Directive

Article 17 of the Sixth VAT Directive (Article 167 and 168 of the EU VAT Directive 2006/112/EC).

Article 167 (Origin and scope of right of deduction)
A right of deduction shall arise at the time the deductible tax becomes chargeable.

Article 168
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

BLP is a management/holding company. It exercises control over a number of trading companies which produce goods for use in the furniture and DIY industries, and provides management services for them.
In 1989 BLP bought the share capital (4) of a German company by the name of Berg Mantelprofilwerk GmbH (“Berg”).
In May 1991 the directors of BLP decided in view of the company’ s poor financial position that the shares in Berg ought to be sold. In June 1991 BLP sold 95% of those shares. The income from the sale was used to discharge BLP’ s indebtedness to its bankers.
In its VAT return for the period ending 30 September 1991, BLP claimed to deduct from the VAT payable on its outputs the amount of the VAT included in three invoices for services from its bank, its solicitors and its accountants. According to the three invoices, the services in question were supplied in connection with the sale of the shares in Berg.
BLP and the Commissioners agreed that the sale of the shares in Berg was an exempt supply by BLP for VAT purposes and that input tax paid on services which are wholly attributable to an exempt supply cannot be deducted.
The total amount which BLP sought to deduct as input tax in respect of the services received by it was 45 975. (5) The Commissioners allowed BLP to deduct 6 120 as relating to services rendered before the decision to sell the shares, which were thus part of BLP’ s general operating costs. The Commissioners refused to allow BLP to deduct the remaining 39 845 on the grounds that it related to services provided in connection with the sale of the shares and that the sale of shares was an exempt supply for VAT purposes, in respect of which no input tax could be deducted.
BLP appealed against the Commissioners’ decision to the London Value Added Tax Tribunal (“the Tribunal”), arguing firstly that there had been an infringement of Articles 17 and 19 of the Sixth Directive, and secondly that the special method had been misapplied. The Tribunal rejected the arguments based on Articles 17 and 19 of the Sixth Directive, and decided with respect to the special method that the sale of shares in question constituted an incidental financial transaction. The Tribunal did not make a final determination of the consequences of that classification.
BLP appealed to the High Court against that decision, arguing that the Tribunal had interpreted Articles 17 and 19 of the Sixth Directive incorrectly. It conceded that the points of Community law raised in the appeal would alone determine the outcome of the appeal.
According to BLP, in applying Articles 17 and 19 of the Sixth Directive and in particular in interpreting the phrase “for the purposes of his taxable transactions” in Article 17(2), attention must not be focused on the immediate transaction in which BLP (by selling the Berg shares) made a taxable supply. Instead, in the interests of fiscal neutrality, the focus must be the wider purpose of that supply, namely the discharge of BLP’ s bank debts. The sale of the shares represents an incidental financial transaction, which was part of BLP’ s overall strategy in the conduct of its core business and the making of its taxable supplies of goods or services.
The Commissioners, on the other hand, contended that where services are supplied to a taxable person and are used, as in the present case, for an exempt supply, input tax is not deductible. The purpose of the exempt supply is irrelevant, above all because only the amount of VAT borne directly by the various cost components of a taxable transaction within the meaning of Article 2 of the First Directive can be deducted. If, as in the present case, a taxable person makes an exempt supply in order to raise money for discharging debts, the input tax on cost components of the exempt supply does not constitute VAT borne directly by the cost components of the taxable person’ s taxable transactions.

Questions

(1) Having regard to Article 2 of the First Directive and Article 17 of the Sixth Directive, where a taxable person (‘ A’ ) supplies services to another taxable person (‘ B’ ), and those services are used by B for an exempt transaction (sale of shares) which was treated as an ‘incidental financial transaction’ and whose purpose and result was to raise money to discharge all of B’ s indebtedness, are those services supplied by A:
- (a) services used for the purpose of an exempt transaction such that input tax thereon is not deductible;
- (b) services used for the purpose of taxable transactions (namely B’ s core business of making taxable supplies) such that input tax thereon is deductible in whole;
- (c) services used for both exempt and taxable transactions such that the input tax thereon is deductible in accordance with Article 17(5) of the Sixth Directive?
(2) If the answer to question 1 is that (c) applies and if a Member State has, in the exercise of its discretion under Article 17(5) of the Sixth Directive, adopted a special method falling within Article 17(5)(c) for determining the amount of the input tax which can be deducted, does Article 19 of the Sixth Directive have any application to the determination of the amount of the deductible input tax?
(3) If the answer to question 2 is that Article 19 does apply to the determination of the amount of the deductible input tax, does Article 19(2) allow full deduction of the input tax by excluding the share sale from the calculation of the deductible proportion under Article 19(1) as being an ‘incidental financial transaction’ ?

AG Opinion

If a taxable person supplies another taxable person with services which the latter uses for an exempt transaction, in the sense that they constitute a cost component with respect to that transaction, the input tax on those services has been used for the purposes of an exempt transaction, within the meaning of Article 17 of the Sixth Directive, and, subject to any derogations from the common system of value added tax, cannot be deducted. That applies even if the exempt transaction was treated as an “incidental financial transaction” and its purpose and result were to raise money for the discharge of the entire indebtedness of the other taxable person.

Decision

Article 2 of the First Council Directive 67/227/EEC of 11 April 1967 on the harmonization of legislation of Member States concerning turnover taxes and Article 17 of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, must be interpreted as meaning that, except in the cases expressly provided for by those directives, where a taxable person supplies services to another taxable person who uses them for an exempt transaction, the latter person is not entitled to deduct the input VAT paid, even if the ultimate purpose of the transaction is the carrying out of a taxable transaction.

Summary

Where a taxable person supplies services to another taxable person, who uses those services for an exempt transaction, the latter is not entitled to deduct input VAT, even if the purpose of the exempt transaction is ultimately to carry out a taxable transaction.

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