Flashback on ECJ Cases C-415/98 (Bakcsi) – Asset allocation determines VAT treatment of a later sale

On 8 March 2001, the ECJ issued its judgment in Case C-415/98, Bakcsi. [eur-lex.europa.eu]

Summary

Facts: A self-employed haulage contractor bought a second-hand car from a private individual without deductible VAT, used it 70% for business, deducted VAT on repair expenses and later sold it without separately stating VAT. The German tax authority taxed the full sale price. [eur-lex.europa.eu]
Issue: The dispute concerned whether a taxable person could retain a mixed-use capital item wholly within private assets and how a later sale was taxed where the asset had been acquired without deductible VAT.
Question to the Court: The Bundesfinanzhof asked whether mixed-use goods could be allocated wholly to private assets and whether the sale of business goods acquired from a private individual without deduction was fully subject to VAT.
Decision: A taxable person may retain a mixed-use asset wholly within private assets. If the asset is allocated wholly to the business, its sale is fully taxable. If only the business-use part is allocated, only that part of the sale is taxable.
Argumentation: The initial allocation determines whether the taxable person acts privately or as a taxable person on sale. Deduction of VAT on repair and maintenance costs does not itself determine the allocation of the underlying capital asset.

Facts

László Bakcsi operated as a self-employed haulage contractor. In 1990, he used a Mercedes 300 D motor car approximately 70% for business purposes.
He had bought the car from a private individual and could not deduct VAT on the acquisition. He subsequently claimed input VAT deductions on expenses relating to repairs.
On 16 May 1990, Mr Bakcsi sold the vehicle for DEM 19,000 without separately stating VAT. The Finanzamt Fürstenfeldbruck treated the sale as taxable and calculated VAT from the gross sales price.
The Finanzgericht agreed, reasoning that the deduction of VAT on repairs demonstrated that the car had been allocated to the business.
On appeal, the Bundesfinanzhof questioned whether deduction on running or repair costs established the allocation of the vehicle itself and referred two questions to the Court. [eur-lex.europa.eu]

Issue

The case concerned the interaction of:

Article 2(1) of Sixth Council Directive 77/388/EEC, covering supplies made for consideration by a taxable person acting as such.
Article 5(6), concerning the withdrawal of business goods for private purposes.
Article 11A(1)(a), determining the taxable amount for supplies.

The underlying question was whether actual business use automatically brought a capital asset into the business estate or whether the taxable person retained a choice to keep the asset wholly or partly outside the VAT system.

Questions Referred

The referring court submitted the following questions, reproduced in the official judgment:

May a trader allocate goods used for mixed purposes (business and non-business) wholly to his private assets, regardless of the extent to which they are used in his business?
Where a person has acquired goods from a private individual for the purposes of his business with no right to deduct input tax and subsequently disposes of them, is that disposal fully liable to turnover tax in accordance with Articles 2 (1) and 11.A (1) (a) of Directive 77/388/EEC?

Advocate General’s Opinion

Advocate General Antonio Saggio delivered an Opinion on 13 April 2000.

The Advocate General considered that the Sixth Directive allowed a taxable person to keep a mixed-use capital item wholly outside the business assets. Where the asset was allocated to the business, however, its later sale took place in the capacity of a taxable person.

The Advocate General’s official proposed answer should be consulted in the published Opinion.

The Court broadly followed the allocation-based approach.

Decision

The Court ruled as follows:

A taxable person who acquires a capital item in order to use it for both business and private purposes may retain it wholly within his private assets and thereby exclude it entirely from the system of value added tax.
Where a taxable person has chosen to incorporate wholly into his business assets a capital item which he uses for both business and private purposes, the sale of that item is subject in full to value added tax, in accordance with Articles 2 (1) and 11.A (1) (a) 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 a taxable person assigns to his business assets only the part of the item used for business purposes, only the sale of that part is subject to value added tax. The fact that the item was purchased second-hand from a non-taxable person and that the taxable person was therefore not authorised to deduct the residual value added tax on that item is irrelevant in this regard. However, if the taxable person withdraws such an item from his business, the value added tax on that item must be considered not to be deductible for the purposes of Article 5 (6) of the Sixth Directive and no tax may therefore be levied on that withdrawal under that provision. If the taxable person subsequently sells the item, he will be carrying out that transaction in a private capacity and the transaction will therefore be excluded from the system of value added tax.

The judgment makes the taxpayer’s initial allocation decision decisive for the VAT treatment of the subsequent disposal.

Argumentation

Freedom to allocate mixed-use property

The Sixth Directive did not require all economically used property to be included in the business assets. A taxable person could:

Allocate a mixed-use asset wholly to the business.
Allocate only the business-use portion.
Retain the asset wholly within private assets.

If the asset was retained privately, no deduction was available on its acquisition and a later private sale fell outside VAT.

Actual use and evidence of allocation

Actual business use was relevant where the taxable person claimed deduction of VAT incurred on acquiring the asset. It helped determine whether the person had acquired the asset while acting as a taxable person.

However, the VAT treatment of the asset itself had to be distinguished from VAT on goods and services used for its repair, maintenance or operation. Deducting VAT on repairs therefore did not automatically prove that the underlying vehicle had been allocated to the business.

Sale of a business asset

Where an asset was allocated wholly to the business, its sale was fully taxable. The absence of deductible VAT on the original second-hand purchase did not convert the later business sale into a private transaction.

A taxable person could first withdraw the asset from the business. If the original acquisition had not given rise to deduction, Article 5(6) did not tax that withdrawal. A subsequent sale made in a private capacity then fell outside VAT. This outcome prevented double taxation. [eur-lex.europa.eu]

Source

Similar ECJ Cases

C-97/90 Lennartz (no VATupdate judgment page identified): Established principles governing the allocation of mixed-use capital goods and immediate deduction.
C-291/92 Armbrecht (no VATupdate judgment page identified): Confirmed that a taxable person may retain the privately used portion of an asset outside the VAT system.
C-20/91 de Jong (no VATupdate judgment page identified): Explained the equal-treatment purpose of taxing withdrawals of business goods.
Joined Cases C-322/99 and C-323/99 Fischer and Brandenstein (no VATupdate judgment page identified): Examined private withdrawals of assets originally acquired without deductible VAT but subsequently improved using deductible inputs.

Reference to the Case in Other EU Member States

Bakcsi is regularly reflected in the EU case law on mixed-use assets and the distinction between business and private ownership for VAT purposes. Its continued practical importance lies in separating the allocation of a capital asset from the deduction treatment of later operating and maintenance expenditure.