Flashback on ECJ Cases: ECJ C-230/94 (Renate Enkler) – Judgment – Hiring out a motor caravan: economic activity and taxable amount for private use

On 26 September 1996, the ECJ released the judgment in case C-230/94 (Renate Enkler v Finanzamt Homburg). [eur-lex.europa.eu]

Source Curia

Context

Reference for a preliminary ruling under Article 177 of the EC Treaty from the Bundesfinanzhof concerning the interpretation of Articles 4(1) and (2), 6(2)(a) and 11A(1)(c) of Sixth Council Directive 77/388/EEC of 17 May 1977, read in the context of Articles 2(1), 4(3) and 17(1) and (2) of that directive and the corresponding provisions of the German Umsatzsteuergesetz 1980, in particular point 1 of Paragraph 1(1), Paragraph 2(1), Paragraph 14(3) and Paragraph 19(3).

Articles of the Sixth VAT Directive discussed

Article 2(1): Transactions subject to VAT

“The following shall be subject to value added tax:

the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such.”

Relevance to the case

Article 2(1) established the basic condition for bringing Mrs Enkler’s hiring transactions within the VAT system. The hiring of the motor caravan could be subject to VAT only if it constituted a supply of services for consideration and Mrs Enkler made that supply as a taxable person acting as such. The central dispute was therefore not whether payments had been made for the use of the motor caravan, but whether Mrs Enkler’s activities were sufficiently economic and continuous to give her the status of a taxable person. [eur-lex.europa.eu], [eur-lex.europa.eu]

Article 4(1): Definition of a taxable person

“‘Taxable person’ shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity.”

Relevance to the case

This provision required the Court to determine whether Mrs Enkler independently carried out an “economic activity”. It also established that the purpose or financial result of the activity was not decisive in itself. Consequently, the fact that the hiring activity generated modest income or resulted in a substantial loss could not, on its own, exclude taxable-person status. Objective evidence was nevertheless required to establish that the motor caravan was genuinely exploited for the purpose of obtaining income on a continuing basis. [eur-lex.europa.eu], [eur-lex.europa.eu]

Article 4(2): Definition of economic activities

“The economic activities referred to in paragraph 1 shall comprise all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions. The exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis shall also be considered an economic activity.”

Relevance to the case

Article 4(2) was the principal provision considered by the Court. The Bundesfinanzhof asked whether hiring tangible property should be classified under the first sentence as the activity of a person supplying services or specifically under the second sentence as the exploitation of tangible property. The Court held that hiring tangible property constitutes exploitation of that property. It qualifies as an economic activity if it is undertaken for the purpose of obtaining income on a continuing basis. Because a motor caravan can be used both commercially and privately, all the circumstances of its use had to be examined. [eur-lex.europa.eu]

Article 4(3): Occasional economic activities

The relevant part provided:

“Member States may also treat as a taxable person anyone who carries out, on an occasional basis, a transaction relating to the activities referred to in paragraph 2…”

Relevance to the case

The Court compared Article 4(2) with Article 4(3) to conclude that the economic activities covered automatically by Article 4(2) do not include activities carried out only on an occasional basis. Article 4(3) permits Member States, subject to its conditions, to treat certain persons carrying out occasional transactions as taxable persons. This comparison supported the requirement that exploitation under the second sentence of Article 4(2) must be directed towards obtaining income on a continuing basis. [eur-lex.europa.eu], [eur-lex.europa.eu]

Article 6(1): Definition of a supply of services

“‘Supply of services’ shall mean any transaction which does not constitute a supply of goods within the meaning of Article 5.”

Relevance to the case

The hiring of the motor caravan constituted a supply of services rather than a supply of goods. Article 6(1) therefore provided the general classification of the hiring transactions. However, the decisive issue was whether those services were supplied by Mrs Enkler in the course of an economic activity and whether she consequently acted as a taxable person. [eur-lex.europa.eu]

Article 6(2)(a): Private use of business goods

“The following shall be treated as supplies of services for consideration:

(a) the use of goods forming part of the assets of a business for the private use of the taxable person or of his staff or more generally for purposes other than those of his business where the value added tax on such goods is wholly or partly deductible…”

Relevance to the case

If Mrs Enkler’s motor caravan formed part of the assets of a taxable business and the VAT paid on its purchase was wholly or partly deductible, its private use had to be treated as a supply of services for consideration. This provision was intended to place a taxable person who privately uses business goods on an equivalent VAT footing to a final consumer who purchases and uses equivalent goods privately. The fourth question concerned the taxable amount for this deemed supply, including the treatment of periods during which the motor caravan was not actually being used but was available for private use. [eur-lex.europa.eu]

Article 11A(1)(c): Taxable amount for deemed supplies of services

“The taxable amount shall be:

…
(c) in respect of supplies referred to in Article 6(2), the full cost to the taxable person of providing the services.”

Relevance to the case

This provision determined the taxable amount for the private use treated as a supply of services under Article 6(2)(a). The Court held that the taxable amount could include expenses incurred during periods when the goods were available to the taxable person and could actually be used at any time for non-business purposes. However, only expenses relating to the goods themselves, such as depreciation, or expenses carrying a right to deduct VAT could be included. The relevant portion had to be established through a proportional allocation based on actual use. [eur-lex.europa.eu]

Article 17(1): When the right to deduct arises

“The right to deduct shall arise at the time when the deductible tax becomes chargeable.”

Relevance to the case

Article 17(1) was cited in the Court’s reasoning concerning the relationship between input VAT deduction and the taxation of private use. Once the acquisition VAT became chargeable and the conditions for deduction were met, the corresponding private use of the business asset could become taxable under Article 6(2)(a). [eur-lex.europa.eu]

Article 17(2): Right to deduct input VAT

The relevant part provided:

“In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:

(a) value added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person…”

Relevance to the case

Mrs Enkler claimed deduction of the VAT connected with acquiring and operating the motor caravan. Such deduction depended on her establishing that she was a taxable person and that the motor caravan was used for taxable transactions. Article 6(2)(a) complemented the deduction mechanism by taxing subsequent private use where the acquisition VAT had been wholly or partly deducted. [eur-lex.europa.eu], [eur-lex.europa.eu]

Facts and Background

Acquisition and declared business intention: Renate Enkler worked in her husband’s tax consultancy firm. On 15 September 1984, she notified the competent authorities that she intended to operate a motor-caravan hiring business. On 28 September 1984, she purchased one motor caravan for DM 46,249, plus VAT of DM 6,474.89. The vehicle was registered in her name. In her 1984 VAT return, she deducted DM 7,270.77 of input VAT, although the motor caravan had been used exclusively for private purposes during that year. This raised the question whether her declared business intention was supported by objective evidence of a genuine economic activity.
Limited hiring activity: In 1985, Enkler declared turnover of DM 2,535, of which DM 2,205 came from hiring the motor caravan to her husband. In 1986, she declared turnover of DM 1,728, including DM 868 from her husband. He paid DM 90 per day and also contributed substantially to the vehicle’s purchase and maintenance costs. Over more than two years, the motor caravan was hired only twice to unrelated third parties, for 18 days in total. It was used privately for 79 days, by her husband for 40 days, and for repair-related journeys for 113 days during the relevant period.
Non-commercial features of the arrangements: The motor caravan was normally covered by private third-party insurance. Separate insurance for a hired vehicle was obtained only when it was supplied to unrelated third parties, while Enkler’s husband could use it without additional commercial cover. Enkler did not advertise the vehicle for hire in daily newspapers. When it was not being used, it was stored in a covered parking area near the Enklers’ residence. She had no separate office, fleet, storage premises or maintenance facilities for a hiring business. These circumstances raised doubts as to whether the arrangements resembled commercial motor-caravan hiring or the private ownership of a leisure vehicle.
Assessment by the German tax authorities: In 1986, Enkler stated that she intended to use the motor caravan exclusively for private purposes. The Finanzamt initially assessed VAT according to her returns but subsequently issued rectification notices for 1984 to 1986. It considered that she was not acting as a trader and therefore denied the treatment claimed in her returns. However, it required payment of the VAT that she had separately charged to persons hiring the vehicle. Enkler’s administrative appeal was dismissed. The Finanzgericht likewise found that she was not carrying on an economic activity, relying on the limited hiring, predominant private characteristics, family financing and substantial losses.
Reference to the European Court: Enkler appealed to the Bundesfinanzhof, which considered that the relevant German VAT provisions had to be interpreted in accordance with the Sixth VAT Directive. It asked whether hiring tangible property constituted economic exploitation under Article 4(2), how such an activity should be distinguished from private activity, and whether Enkler’s limited hiring could produce income on a continuing basis. It also asked whether, if the motor caravan formed part of a business, the taxable amount for private use under Articles 6(2)(a) and 11A(1)(c) should include expenses relating to unoccupied periods during which the vehicle remained available for private use.

Questions Referred

Classification of the hiring activity

Is the hiring out of tangible property to be regarded:
- (a) as an activity of a person supplying services within the meaning of the first sentence of Article 4(2) of Sixth Directive 77/388/EEC; or
- (b) solely as the exploitation of tangible property for the purpose of obtaining income therefrom on a continuing basis within the meaning of the second sentence of Article 4(2) of that directive?

Distinguishing economic activity from private activity

Is every grant of use of tangible property for consideration an economic activity within the meaning of the second sentence of Article 4(2) of the Sixth Directive or, in order for it to constitute an economic activity, must it be possible to distinguish it from a private activity?
Must that distinction be made:
- by reference to specific features, such as the economic importance of the activity, the duration of the grant of use and the amount of consideration; or
- by comparison with the usual forms of the economic activity concerned, in this case the commercial hiring out of motor caravans?

Limited hiring of a motor caravan

Is the hiring out of a motor caravan to be regarded as an economic activity carried on for the purpose of obtaining income on a continuing basis where, over a period exceeding two years, it is hired out to only two third parties for a few days and to the lessor’s spouse for approximately six weeks, for total consideration of approximately DM 4,300?

Expenses relating to periods of availability for private use

If the answer to the third question is affirmative, must the taxable amount under Article 11A(1)(c) of the Sixth Directive for the supply of services within the meaning of Article 6(2) include expenses incurred during periods in which the property available for hire is available for the lessor’s private use, namely unoccupied periods? [eur-lex.europa.eu], [eur-lex.europa.eu]

AG Opinion

Advocate General G. Cosmas delivered his Opinion on 28 March 1996.

Question 1: The Advocate General proposed that the hiring out of tangible property be treated as a form of exploitation of that property. It constitutes an economic activity subject to VAT where, under the second sentence of Article 4(2) of the Sixth Directive, it is carried on for the purpose of obtaining income on a continuing basis.
Question 2: The Advocate General proposed that it was necessary to determine whether the independent hiring activity was carried on with a view to obtaining income on a continuing basis. This was a factual assessment based principally on objective criteria, including the nature of the property and all the circumstances in which it was used. The number of customers and level of earnings could not, by themselves, determine the classification, but could be considered together with other circumstances.
Question 3: The Advocate General considered that the Court should not itself determine whether the specific hiring activity described by the Bundesfinanzhof constituted an economic activity, since that required an assessment of the facts falling within the jurisdiction of the national court. The circumstances described in the question could, however, be considered as part of the overall objective assessment.
Question 4: The Advocate General proposed that the taxable amount under Article 11A(1)(c) should include both expenses incurred during actual private use and expenses incurred while the business asset was available to the taxable person in circumstances allowing private use at any time. The relevant portion should be calculated according to the ratio between the total duration of actual use and the duration of actual use for purposes other than those of the business. [eur-lex.europa.eu]

Decision / Order of the Court

The Court delivered a Judgment.

Question 1: The hiring out of tangible property constitutes exploitation of that property and must be classified as an economic activity within the meaning of Article 4(2) of Sixth Directive 77/388/EEC where it is carried on for the purpose of obtaining income therefrom on a continuing basis.
Questions 2 and 3: To determine whether the hiring out of tangible property, such as a motor caravan, is carried on with a view to obtaining income on a continuing basis within the meaning of the second sentence of Article 4(2), the national court must evaluate all the circumstances of the particular case. The Court did not itself classify Mrs Enkler’s activity definitively.
Question 4: Article 11A(1)(c) of the Sixth Directive must be interpreted as requiring the taxable amount for transactions treated as supplies of services under Article 6(2)(a) to include expenses incurred during periods in which the goods are at the taxable person’s disposal in such a way that they can actually be used at any time for non-business purposes, provided that those expenses relate to the goods themselves or are expenses in respect of which the taxable person is entitled to deduct VAT. The amount included must be proportionate to the ratio between the total duration of actual use of the goods and the duration of actual use for non-business purposes. [eur-lex.europa.eu]

Argumentation

(Hiring as exploitation of tangible property)

The Court compared Article 4(2) with Article 4(3) of the Sixth Directive and observed that the concept of economic activity in Article 4(2) does not encompass activities carried out merely on an occasional basis. Hiring out tangible property constitutes “exploitation” of that property within the second sentence of Article 4(2). It is therefore an economic activity where the property is exploited for the purpose of obtaining income on a continuing basis.

(Objective evidence and burden of proof)

A person claiming the right to deduct input VAT must establish that the conditions governing that right are satisfied, including the condition of being a taxable person. Article 4 does not preclude the tax authorities from requiring a declared intention to conduct an economic activity to be supported by objective evidence. The competent national administrative and judicial authorities must therefore assess all the specific circumstances of the case.

(Purpose, results and continuity)

Under Article 4(1), the purpose or results of an activity are not, as such, decisive in determining whether the activity falls within the VAT system. A loss-making activity or an activity generating modest revenue may still constitute an economic activity. The decisive question is whether the property is exploited for the purpose of obtaining income on a continuing basis.

(Nature of the property)

The nature of the property is relevant. Where property is suitable only for economic exploitation, that characteristic will normally be sufficient to indicate that the owner exploits it for an economic activity. Where, as with a motor caravan, the property is capable of both economic and private use, all the circumstances of its use must be examined.

(Comparison with normal commercial activity)

The circumstances in which the property is actually used may be compared with those in which the corresponding economic activity is normally carried out. Relevant objective factors may include the actual duration of hiring, the number of customers, the level of earnings, advertising arrangements, insurance arrangements, the location where the property is kept and the overall pattern of private and commercial use.

(Results as evidential factors)

The actual result of the activity cannot, by itself, determine whether the activity was undertaken to obtain continuing income. Nevertheless, the duration of the hiring periods, the number of customers and the amount of earnings form part of the overall circumstances that the national court may consider.

(Private use as a deemed supply)

Article 6(2)(a) treats the private use of business goods as a supply of services for consideration where the VAT on those goods was wholly or partly deductible. The purpose is to prevent a taxable person who deducted VAT on the acquisition of business goods from obtaining an advantage over a final consumer when using those goods privately.

(Strict scope of “use of goods”)

Because taxation of private use is exceptional, the term “use of goods” in Article 6(2)(a) must be interpreted strictly. It covers the use of the goods themselves. Services supplied by third parties for maintaining or using the goods are not covered where the taxable person was unable to deduct the related input VAT.

(Availability for private use)

The principle of equal treatment between taxable persons and final consumers requires account to be taken of periods during which the business asset is available to the taxable person in such a manner that it may actually be used at any time for private purposes. A final consumer who owns equivalent property is likewise able to use it whenever desired.

(Scope and apportionment of expenses)

Only expenses relating to the goods themselves, such as depreciation, and expenses that gave rise to a right of deduction may be included in the taxable amount. Since periods of availability may simultaneously serve private and business purposes, not all such expenses may be allocated to private use. The taxable portion must be proportionate to the relationship between the total period of actual use and the period of actual non-business use. [eur-lex.europa.eu]

References to Other ECJ Case Law

Case 268/83, Rompelman v Minister van Financiën: Cited for the principle that hiring out tangible property constitutes exploitation of that property within Article 4(2), and that tax authorities may require a declared intention to conduct an economic activity to be supported by objective evidence.
Case C-97/90, Lennartz v Finanzamt München III: Cited for the principle that the nature of the goods is a relevant factor when determining whether they were acquired or used for the purposes of an economic activity.
Case C-20/91, De Jong v Staatssecretaris van Financiën: Cited for the principle that the deemed-supply rules prevent a taxable person who deducted input VAT on business goods from obtaining an unjustified advantage over an ordinary final consumer when those goods are used privately.
Case C-193/91, Mohsche: Cited for the principle that taxation of private use is exceptional and that “use of goods” in Article 6(2)(a) must be interpreted strictly as covering the use of the goods themselves, not third-party services for which input VAT was not deductible. [eur-lex.europa.eu]