Abbey National plc v Customs and Excise Comrs: C-408/98

[2001] ECR I-1361, [2001] All ER (EC) 385, [2001] 1 WLR 769, [2001] 2 CMLR 595, [2001] STC 297, [2001] All ER (D) 277 (Feb)

Court: ECJ

Judgment Date: 22/02/2001

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Catchwords & Digest


EUROPEAN COMMUNITY - VALUE ADDED TAX - INPUT TAX - TRANSFER OF A TOTALITY OF ASSETS - DEDUCTION OF INPUT TAX ON SERVICES USED BY TRANSFEROR FOR PURPOSES OF TRANSFER - GOODS AND SERVICES USED FOR PURPOSES OF TAXABLE PERSON'S TAXABLE TRANSACTIONS - SIXTH COUNCIL DIRECTIVE (EEC) 77/388, ARTS 5, 17.

SM plc, a life assurance company incorporated in the United Kingdom, was a 100% subsidiary of AN plc, which represented it for value added tax (VAT) purposes. In addition to its insurance business, SM plc carried on a business leasing premises for professional or commercial use. As part of that activity, it held a 125-year lease of a building for professional and commercial use which it sublet to commercial tenants. SM plc had opted to charge VAT on the rent it received for the building, in accordance with the United Kingdom legislation transposing the Sixth Council Directive (EEC) 77/388 (on the harmonisation of the laws of the member states relating to turnover taxes--Common system of value added tax: uniform basis of assessment) (the Sixth Directive), and was thus able to recover all the input VAT paid on the costs connected with ownership of the building. Article 5(8) of the Sixth Directive provided that member states could, on a transfer of a totality of assets or part thereof, consider that no supply of goods had taken place and that the recipient was the successor to the transferor. The United Kingdom, making use of the option provided for in art 5(8) of the Sixth Directive, had adopted reg 5(1) of the Value Added Tax (Special Provisions) Order 1995, SI 1995/1268. Under that provision, where a person transferred a business or part of a business as a 'going concern', the transfer was neither regarded as a supply of goods nor as a supply of services. The transferee had to use the assets for carrying on the same kind of business as the transferor, and had to be, or immediately become, a taxable person. In the case of a transfer of part of a business, that part had to be capable of separate operation. Article 17(5) of the Sixth Directive, in the light of which para (2) of that article had to be interpreted, laid down the rules applicable to the right to deduct VAT where the VAT related to input transactions used by the taxable person 'both for transactions covered by paragraphs 2 and 3, in respect of which value added tax is deductible, and for transactions in respect of which value added tax is not deductible'. Subsequently, SM plc sold its rights under the lease and its rights in the sub-lease to a company not belonging to the same group. The Commissioners of Customs and Excise considered that the sale constituted a 'transfer as a going concern' within the meaning of reg 5(1) of the 1995 Order, that the other conditions in that regulation were satisfied, and that no VAT was therefore due on the sale price. However, in order to effect the transfer, SM plc used various services and thus incurred professional fees, on which it had to pay VAT. The commissioners considered that only part of the input VAT paid on those costs could be recovered. AN plc, which contended that it was entitled to recover all the VAT, applied to the VAT and Duties Tribunal in London. When that application was dismissed, AN plc appealed to the High Court of Justice of England and Wales, Queen's Bench Division, Divisional Court. In those circumstances, the High Court stayed the proceedings and referred to the Court of Justice of the European Communities for a preliminary ruling under art 177 of the EC Treaty (now art 234 EC), the question, inter alia, whether, in circumstances where a member state has exercised the option in art 5(8) of the Sixth Directive, so that the transfer of a totality of assets or part thereof was regarded as not being a supply of goods, the transferor could deduct the VAT on the costs of the services acquired in order to effect the transfer.Held:According to its true construction, art 17(2), (3) and (5) of the Sixth Directive had to be interpreted as meaning that, in principle, the existence of a direct and immediate link between a particular input transaction and a particular output transaction or transactions giving rise to the right to deduct was necessary before the taxable person was entitled to deduct input VAT and in order to determine the extent of such entitlement. It was clear from art 17(2) of the Sixth Directive that a taxable person could deduct only the VAT on the goods and services used for the purposes of his own taxable transactions. Moreover, where a member state had made use of the option in art 5(8) of the Sixth Directive, so that the transfer of a totality of assets or part thereof was regarded as not being a supply of goods, the costs incurred by the transferor for services acquired in order to effect that transfer formed part of that taxable person's overheads and thus in principle had a direct and immediate link with the whole of his economic activity. If, therefore, the transferor effected both transactions in respect of which VAT was deductible and transactions in respect of which it was not, it followed from art 17(5) of the Sixth Directive that he could deduct only that proportion of the VAT which was attributable to the former transactions. However, if the various services acquired by the transferor in order to effect the transfer had a direct and immediate link with a clearly defined part of his economic activities, so that the costs of those services formed part of the overheads of that part of the business, and all the transactions relating to that part of the business were subject to VAT, he could deduct all the VAT charged on his costs of acquiring those services.