Flashback on ECJ Cases – C-488/07 (Royal Bank of Scotland) – Proportional deduction – No obligation to apply the rounding up rule

On December 18, 2008, the ECJ issued its decision in the case C-488/07 (Royal Bank of Scotland).

Context: Sixth VAT Directive – Deduction of input tax – Goods and services used for both taxable and exempt transactions – Deductible proportion – Calculation – Methods laid down in the third subparagraph of Article 17(5) – Obligation to apply the rounding up rule in the second subparagraph of Article 19(1)

Article in the EU VAT Directive

Articles 17(5), 19(1) of the Sixth VAT Directive (Articles 173, 174(1), 175(1) of the EU VAt Directive 2006/112/EC).

Article 173 (Proportional deduction)
1. In the case of goods or services used by a taxable person both for transactions in respect of which VAT is deductible pursuant to Articles 168, 169 and 170, and for transactions in respect of which VAT is not deductible, only such proportion of the VAT as is attributable to the former transactions shall be deductible.
The deductible proportion shall be determined, in accordance with Articles 174 and 175, for all the transactions carried out by the taxable person. ▼M3
2. Member States may take the following measures:
(a) authorise the taxable person to determine a proportion for each sector of his business, provided that separate accounts are kept for each sector;
(b) require the taxable person to determine a proportion for each sector of his business and to keep separate accounts for each sector;
(c) authorise or require the taxable person to make the deduction on the basis of the use made of all or part of the goods and services;
(d) authorise or require the taxable person to make the deduction in accordance with the rule laid down in the first subparagraph of paragraph 1, in respect of all goods and services used for all transactions referred to therein;
(e) provide that, where the VAT which is not deductible by the taxable person is insignificant, it is to be treated as nil.

Article 174
1. The deductible proportion shall be made up of a fraction comprising the following amounts:
(a) as numerator, the total amount, exclusive of VAT, of turnover per year attributable to transactions in respect of which VAT is deductible pursuant to Articles 168 and 169;
(b) as denominator, the total amount, exclusive of VAT, of turnover per year attributable to transactions included in the numerator and to transactions in respect of which VAT is not deductible.
Member States may include in the denominator the amount of subsidies, other than those directly linked to the price of supplies of goods or services referred to in Article 73.

Article 175
1. The deductible proportion shall be determined on an annual basis, fixed as a percentage and rounded up to a figure not exceeding the next whole number.

Facts

Royal Bank of Scotland is the representative member of a group of companies whose main business is banking and the provision of other financial services. In the course of its business, the company makes both taxable and exempt supplies. The goods and services on whose acquisition Royal Bank of Scotland has paid VAT are used for both taxable and exempt transactions.
According to the order for reference, if part of the input tax for which Royal Bank of Scotland is liable cannot be wholly attributed to either taxable or exempt supplies, that part is referred to by the parties to the main proceedings as ‘residual’ input tax.
On 31 May 2002, the parties to the main proceedings entered into a Partial Exemption Special Method and Approval Agreement relating to the residual input tax of Royal Bank of Scotland’s VAT group. That agreement laid down certain parameters within which a special method could be agreed with that company for each sector of its business. In particular, the agreement provided that, where the method applicable to a particular sector or part of a sector forming part of Royal Bank of Scotland’s business required recovery of input tax to be based on a calculated percentage, that percentage was to be rounded up to two decimal places and regulation 101(4) of the Value Added Tax Regulations 1995 was not to apply.
Subsequently, Royal Bank of Scotland took the view that that provision in the agreement of 31 May 2002 was contrary to Articles 17 and 19 of the Sixth Directive and was, therefore, of no effect. It considered that that directive requires rounding up to the next whole number and sought the agreement of the Commissioners to an apportionment calculation for the purpose of quantifying deductible residual input VAT in relation to a particular sector of its business which included rounding up to the next whole number. Since the Commissioners issued a decision refusing to accept the use of such a method, Royal Bank of Scotland appealed against that decision to the VAT and Duties Tribunal, which, in its decision of 20 January 2006, held that an agreed special method which provided for rounding up to two decimal places was compatible with both United Kingdom law and the Sixth Directive.

Questions

1. Does the second subparagraph of Article 19(1) of the Sixth VAT Directive … require the proportion deductible by a taxable person under Article 17(5) to be determined on an annual basis, fixed as a percentage and rounded up to a figure not exceeding the next unit where:

(a) that proportion is a proportion which has been determined for a sector of the business of the taxable person in accordance with either item (a) or (b) of the third subparagraph of Article 17(5); and/or

(b) that proportion is a proportion which has been determined on the basis of the use of all or part of goods and services by the taxable person in accordance with item (c) of the third subparagraph of Article 17(5); and/or

(c) that proportion is a proportion which has been determined in respect of all goods and services used by the taxable person for all transactions referred to in the first subparagraph of Article 17(5), in accordance with item (d) of the third subparagraph thereof?

2. Does the second subparagraph of the said Article 19(1) permit Member States to require the proportion deductible by a taxable person under Article 17(5) to be rounded up to a figure other than the next highest whole number?

AG Opinion

None

Decision

Member States are not obliged to apply the rounding up rule in the second subparagraph of Article 19(1) 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 where the proportion of input tax deductible is calculated in accordance with one of the special methods in (a), (b), (c) or (d) of the third subparagraph of Article 17(5) of that directive.

Summary

Member States are not obliged to apply the rounding rule laid down in the second subparagraph of Article 19(1) of the Sixth Directive where the proportion for the application of the right to deduct input VAT is calculated in accordance with one of the special methods laid down in Article 17(5), third subparagraph, point (a), (b), (c) or (d) of this directive.

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