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3. The tax authority decided that Mr Lennartz was to be regarded as having initially bought the car wholly for private use and was not therefore entitled to make (2) whether national tax authorities are adjustments under Paragraph 15a when the entitled to treat such goods as being car was subsequently used for business

* Original language: English.

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purposes. The finding that the car was (b) used from the time of acquisition initially used wholly for private purposes for the purposes of the taxable or was based on an administrative practice of exempted transactions (business the German tax authorities whereby purposes) of the taxable person, or business use of goods is generally disre- garded where such use amounts to less than 10% of total use. (c) allocated at the time of acquisition for the purposes of the business of the taxable person?

4. It appears that Mr Lennartz did not, in 1985, claim an initial deduction of the input tax incurred on the acquisition of the car. His appeal in this case is against the 2. If alternative (b) is correct: decision of the tax authorities refusing his claim for a subsequent adjustment under Paragraph 15a in 1986. Does the application of Article 20(2) of the Sixth Directive to capital goods which are used by a taxable person both for business purposes and for other, in 5. In order to assist it in determining the particular private, purposes (mixed use) appeal, the Finance Court has asked for a depend on their having been used to a preliminary ruling on the following specific minimum extent for business questions: purposes in the year in which they were acquired and, if so, how is that minimum extent to be defined?

Rules on the deduction of input tax (iii) from some point before the expiry of a period of five years, including the year of acquisition, 6. It may be helpful if I begin by explaining briefly the purpose of Article 20(2) of the Sixth Directive and its place within the and/or scheme of that directive, in particular its relationship with the rules on the deduction of input tax incurred on the purchase of goods and services. (b) actually uses the capital goods for business purposes and, if so, does it matter whether such use begins 7. Article 2 of the First VAT Directive of 11 April 1967 on the harmonization of (i) from the time of acquisition, legislation of Member States concerning or turnover taxes (Directive 67/227, Official Journal, English Special Edition 1967, p. 14) provides that: (ii) within the year in which the capital goods were acquired, or 'The principle of the common system of value added tax involves the application to (iii) within the period of five goods and services of a general tax on years, including the year in consumption exactly proportional to the which the goods were price of the goods and services, whatever acquired? the number of transactions which take place in the production and distribution process before the stage at which tax is charged.

As far as Questions 3(a) and (b) are concerned: On each transaction, value added tax, calculated on the price of goods or services Where the capital goods are at the rate applicable to such goods or used for mixed purposes, must services, shall be chargeable after deduction the intended use or actual use of the amount of value added tax borne (or both) for business directly by the various cost component

11. Article 17(2) provides that: The normal method for determining that proportion is laid down in Article 19 and involves the use of a fraction representing the ratio between the annual turnover 'In so far as the goods and services are used attributable to transactions in respect of for the purposes of his taxable transactions, which VAT is deductible and, broadly, total

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turnover. However, Article 17(5) allows imposed on the goods. The adjustment shall Member States to authorize or compel be made on the basis of the variations in the taxable persons to use a variety of special deduction entitlement in subsequent years in methods for determining the deductible relation to that for the year in which the proportion. goods were acquired or manufactured.

14. Article 20 of the directive concerns the By way of derogation from the preceding adjustment of deductions which have been subparagraph, Member States may base the made. Article 20(1) provides that: adjustment on a period of five full years starting from the time at which the goods are first used.

'The initial deduction shall be adjusted according to the procedures laid down by In the case of immovable property acquired the Member States, in particular: as capital goods the adjustment period may be extended up to ten years.'

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— permit administrative simplifications.' on the acquisition of the computer (i.e. ECU 4 000).

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20. Against that background, I now turn to final consumption applicable to goods which the questions put by the national court. re-enter the economic circuit (see in particular the Court's judgment of 5 December 1989 in Case 165/88 Oro Amsterdam Beheer v Inspecteur der Omzetbe- lasting. See also the Commission's amended proposal of 11 January 1989 for a Council Question 1(a) directive concerning special arrangements for second-hand goods, works of art, antiques and collectors' items (Official Journal 1989 C 76, p. 10)).

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pursuant to Articles 18 and 22 of the Sixth concession and not as constituting an Directive. As the French Government points economic activity within the meaning of the out, the requirement to provide an invoice directive, the deduction initially made is in Article 22(3)(a) applies only to goods and adjusted and the time-limit for that services supplied to another taxable person. adjustment may be extended up to 10 years.' More generally, if a taxable person acquires goods in his private capacity, he is not under any obligation (indeed it would be inappropriate for him) to enter the goods in However, the Court cannot in my view have his VAT records pursuant to Article 22(2) meant that Article 20(2) was applicable or to include the purchase in his periodic where goods were initially acquired by a VAT return under Article 22(4). taxable person other than for the purposes of his business. In such circumstances any initial deduction wrongly made should be cancelled in full.

25. With more specific reference to Article 20(2), that provision merely establishes, as Question 1(b) and (c) the United Kingdom Government points out, the machinery for calculating adjustments to the initial deduction. It cannot transform tax borne in relation to 27. By these parts of the first question, the non-business activities into deductible tax national court asks whether, if business use under Article 17. Under Article 17(1) the at some point during the adjustment period right to deduct arises at the time when the is not enough to give rise to a right of deductible tax becomes chargeable, as adjustment, the goods must, in order for defined by Article 10. It is the capacity in such a right to arise: which the person acts at that time which determines whether he has the right of deduction. — be used from the time of acquisition for the purposes of taxable or exempt trans- actions (part (b)); or

29. The German Government expressly opts payable or paid in the course of all his for the requirement set out in part (b) of the economic activities. The common system of question, namely use for taxable qg exempt value added tax therefore ensures that all transactions from the date of acquisition. economic activities, whatever their purpose T h e Commission seems to suggest that the or results, provided that they are themselves goods must be allocated to the business and subject to VAT, are taxed in a wholly be used at least in part for taxable trans- neutral way' (paragraph 19). actions. The United Kingdom Government considers that Article 20(2) of the directive only applies to goods that are used for the purposes of the recipient's business from the time of acquisition. The French Government 32. With more particular reference to the considers that Article 20(2) applies if the question put to it, the Court then stated: goods are acquired by a taxable person acting as such. Thus, the French rules grant a right of deduction where capital goods initially allocated to the business but not used for the purposes of transactions giving ' . . . the principle that V A T should be rise to the right of deduction are neutral as regards the tax burden on a subsequently used for such transactions business requires that the first investment within the adjustment period. expenditure incurred for the purposes of and with the view to commencing a business must be regarded as an economic activity. It would be contrary to that principle if such an activity did not commence until the property was actually exploited, that is to 30. In order to reach a conclusion on this say until it began to yield taxable income. point, reference should be made to the Any other interpretation of Article 4 of the Court's judgment in Case 268/83 Sixth Directive would burden the trader Rompelman v Minister van Financien [1985] with the cost of VAT in the course of his E C R 655. The issue in that case was economic activity without allowing him to whether a person who acquired the future deduct it in accordance with Article 17 and title to commercial premises under would create an arbitrary distinction construction with the declared intention of between investment expenditure incurred letting the premises and making taxable before actual exploitation of immovable supplies was, at that preparatory stage, property and expenditure incurred during acting as a taxable person with a right of exploitation. Even in cases in which the deduction. input tax paid on preparatory transactions is refunded after the commencement of actual exploitation of immovable property, a financial charge will encumber the property during the period, which may sometimes be 31. The Court began by considering considerable, between the first investment Articles 4 and 17 of the Sixth Directive and expenditure and the commencement of concluded that: exploitation. Anyone who carries out such investment transactions which are closely connected with and necessary for the future exploitation of immovable property must therefore be regarded as a taxable person 'the deduction system is meant to relieve the within the meaning of Article 4' (paragraph trader entirely of the burden of the VAT 23).

34. In my view a distinction must be drawn between those two requirements, namely acquisition of goods as a taxable person and 36. It also follows that immediate use of the taxable use. The former is a more funda- goods for taxable or exempt supplies is not mental requirement, inasmuch as the in itself a condition for the subsequent acquisition of capital goods wholly for application of Article 20(2). Thus, if in the purposes other than those of the business above example the bank were unable to use does not fall within the scope of the the computer until year two owing to common VAT system or, consequently, the defects in the software, this would deduction mechanism. The use (taxable or not — and ought not to — preclude otherwise) to which the goods are put, or subsequent adjustments to take account of are intended to be put, within the business changes of use. Support for this view is to determines the extent of the initial be derived from the second subparagraph of deduction to which the taxable person is Article 20(2), which specifically allows entitled under Article 17 and the extent of Member States to delay the commencement any adjustments in subsequent periods. of the adjustment period to the time at which the goods are first used.

35. One consequence of that analysis is that Article 20(2) may operate — and on this point I agree with the French Government's observations — even where a taxable person 37. Thus, in the context of this case the acquires goods initially for the purposes of relevant test is whether Mr Lennartz, when economic transactions which, under Article he acquired the goods, had the specific 17(2) and (3), do not give rise to the right intention of using the goods for the of deduction (e.g. exempt supplies) but, in purposes of his business or whether, at that subsequent years within the adjustment time, he intended to use them wholly for period, uses the goods for transactions in purposes other than those of his business. In respect of which VAT is deductible. Thus, the latter case Article 20(2) does not apply.

(b) actually use the goods for business purposes within those periods. 39. In my view, therefore, adjustments to the initial deduction may be made under Article 20(2) only where capital goods were 41. I have already pointed out, in allocated to the business at the time of connection with the national court's first acquisition (part (c) of the national court's question, that a person acquires goods in his first question); provided that that condition capacity as a taxable person where he does is fulfilled, adjustments may be made even if so with the specific intention of using those there was no immediate use of the goods for goods for the purposes of his business. The taxable or exempt transactions. Conse- tax authorities must therefore satisfy them- quently, it is necessary to consider the selves that, as a matter of fact, the taxable national court's third question. person had such an intention at the time when the goods were acquired. In its judgment in Rompelman, already cited, the Court stated that it was 'for the person applying to deduct VAT to show that the Question 3 conditions for deduction are met and in particular that he is a taxable person. Therefore Article 4 does not preclude the revenue authorities from requiring the declared intention to be supported by 40. By this question the national court is in objective evidence such as proof that the substance seeking guidance on the criteria premises which it is proposed to construct to be used in determining whether a person are specifically suited to commercial exploi- acquires goods in his capacity as a taxable tation' (paragraph 24). person. In particular it asks whether the person must

45. Thus, the answer to the national court's third question is that the taxable person must acquire the goods with the specific intention of using them for business purposes (Question 3(a)). Whether a taxable person has that intention at the time when the goods are acquired is a question of fact 43. The national court asks whether the to be determined by the tax authorities year of acquisition or the five-year period having regard to all the circumstances of the commencing with the acquisition might be case. The Sixth Directive does not specify a relevant in this connection. The five-year period within which the goods should period is mentioned presumably because it actually be used for making business corresponds to the five-year adjustment supplies. However, a failure to use the period provided for by Article 20(2) of the goods for making such supplies immediately Sixth Directive. In my view, those periods or within a reasonable period of their are simply convenient periods upon which it acquisition may, depending on the circum- was chosen to base the operation of the stances and in particular the nature of the system of deduction and of adjustments in goods in question, be taken into account by respect of capital goods. They are not, as the tax authorities in determining whether a such, relevant to the question whether person acquired the goods as a taxable goods are acquired for business use. That person and hence whether an initial view is consistent with the discretion deduction may be made under Article 17 or, allowed to Member States in choosing the if already made, should be adjusted (that is various periods. Article 20(2), in particular, to say, cancelled) under Article 20(l)(a). allows the adjustment period for immovable property to be extended up to 10 years, presumably to take account of the longer useful life of such property.

47. This question arises because of the practice of the German tax authorities of presuming that goods have been acquired wholly for purposes other than those of the business where the proportion of 49. The order for reference appears to non-business use exceeds 9 0 % and hence support the German Government's use for the purposes of the business statement that M r Lennartz's appeal is represents less than 10%. In its written reply restricted to a claim for an adjustment to the question put by the Court before the under Article 20(2). Moreover, the German hearing and in its oral observations at the Government is correct in its view that the hearing, the German Government validity of the German de minimis limit is emphasized that those percentages are not relevant, not to Mr Lennartz's entitlement applied rigidly but constitute an 'evidential to adjustments under Article 20(2), but to criterion' to be used in determining whether his right to an initial deduction under or not there is business use. It none the less Article 17(2) in 1985. As I shall explain appears from the order for reference that, later, changes in the proportion of business by virtue of that rule, Mr Lennartz was use are dealt with by another mechanism treated as using the car wholly for private (see paragraph 56 et seq. below) and not by purposes in the period from its acquisition means of the adjustment procedure in in 1985 to 1 July 1986, when he opened his Article 20(2). tax consultancy office, notwithstanding the fact that, in 1985, business use of the car amounted to 8%. In my view, it is therefore necessary, for the purpose of answering the national court's question, to assume that, at least in certain circumstances, the German measure may lead to the refusal of the right to deduct in cases of genuine, albeit limited, business use. 50. Consequently, if the 10% rule were invalid, M r Lennartz would benefit from the invalidity only if he were able to make a retrospective claim to an initial deduction under Article 17(2) pursuant to the German legislation laid down in accordance with Article 18(3) of the directive. This provides 48. At the hearing, the German that: 'Member States shall determine the Government contended that the proceedings conditions and procedures whereby a before the national court were limited to the taxable person may be authorized to make a question of Mr Lennartz's entitlement to deduction which he has not made in make adjustments under Article 20(2) of the accordance with the provisions of para- Sixth Directive. Since he made no claim for graphs 1 and 2'. However, since the

54. The Commission considers that actual 52. The views expressed in the observations use of the goods, albeit minimal, for taxable submitted to the Court differ on this issue. transactions gives rise to the right of In its observations and in its reply to a deduction in full and to subsequent written question asked by the Court, the adjustment in accordance with Article 20(2). German Government states that a deduction is permissible even where the goods are used mainly for non-business purposes. However, in its view, where the proportion of use for business purposes is so insignificant that it has minimal economic significance, the 55. The French Government subscribes to person must be presumed to have acquired the Commission's view and states that, in the goods wholly for purposes other than principle, even minimal utilization for those of the business, with the result that no business purposes, for example 1%, gives right of deduction arises. In the light of the rise to the right to full deduction of input economic considerations underlying the tax, although the private use of the goods VAT legislation, minimal utilization for the will be subject to tax. However, it adds that purpose of the business cannot, it is said, full deduction of input tax in such circum- lead to full deduction. stances is not realistic since it involves technical difficulties and confers unjustified advantages where the goods are hardly used for the purposes of the business. For that reason, France obtained authorization from the Council, pursuant to Article 27(1) of the 53. The United Kingdom states that it Sixth Directive, to introduce special wishes to refrain from commenting on this measures derogating from the provisions of issue. However, it adds that the Sixth the directive. The Council decision Directive does not contain any express (Decision 89/488 of 28 July 1989, Official

'The application by a taxable person of goods forming part of his business assets for his private use or that of his staff, or the 57. Article 11 contains provisions for the disposal thereof free of charge or more valuation of such supplies. Thus Article 11 generally their application for purposes A 1(b) provides that the taxable amount in other than those of his business, where the respect of supplies referred to in Article 5(6) value added tax on the goods in question or is to be 'the purchase price of the goods or the component parts thereof was wholly or of similar goods or, in the absence of a partly deductible, shall be treated as supplies purchase price, the cost price, determined at made for consideration . . . " the time of supply'. Article 11 A 1(c) provides that the taxable amount in respect of supplies referred to in Article 6(2) is to be 'the full cost to the taxable person of providing the services'. Article 6(2) provides as follows:

'The following shall be treated as supplies of 58. Article 6(2)(a), in conjunction with services for consideration: Article 11 A 1(c), therefore envisages that, where a taxable person acquires an asset which he uses partly for private purposes, he will be deemed to make a taxable supply of services for a consideration equal to the full (a) the use of goods forming part of the cost of providing those services. Thus, under assets of a business for the private use of the scheme of the directive, a person who the taxable person or of his staff or uses an asset partly for the purposes of more generally for purposes other than taxable business transactions and partly for those of his business where the value private purposes and, on the acquisition of

'The combined effect of the rules referred to above is that, in the absence of any provision empowering the Member States to limit the right of deduction granted to 59. Support for this view may be found in taxable persons, that right must be exercised the Commission's commentary, in its immediately in respect of all the taxes proposal for the Sixth Directive (Bulletin of charged on transactions relating to inputs. the European Communities, Supplement 11/73), on Article 5(6) (or Article 5(3)(a) as it was in the proposal), which is the equi- valent provision, in Article 5 ('supplies of goods'), to Article 6(2)(a). The Commission stated: 'The same aim [avoidance of unjus- tified advantages for taxable persons] could Such limitations on the right of deduction have been attained by means of adjustments have an impact on the level of the tax to deductions already made, but the burden and must be applied in a similar technique of treating these transactions as manner in all the Member States. Conse- taxable supplies was chosen for reasons of quently, derogations are permitted only in impartiality and simplicity'. Thus, the output the cases expressly provided for in the tax charge was specifically chosen as an directive' (paragraphs 16 and 17). alternative to a restriction on the right to deduct input tax. Although the last sentence of Article 6(2) permits Member States, within certain limits, to derogate from the private use mechanism laid down in that paragraph, that sentence is not applicable here for reasons which I shall explain later The Court concluded that, since the French (see paragraph 75). legislation did not allow total and

62. I conclude that Member States are not entitled to limit the right of deduction, even where business use of the goods in question is very limited, unless they can rely on one of the derogations contained in the 61. I have already pointed out that, under directive. It is to those derogations that I the scheme of the Sixth Directive, a taxable now turn. person acquiring goods partly for taxable business use and partly for private use is deemed to use the goods wholly for the purposes of taxable supplies and therefore in principle has the right to full and immediate Authority to derogate from the right of deduction of input tax incurred on the deduction acquisition of the goods (the private use element being accounted for by means of an output tax charge). The directive contains no de minimis provision excluding the right of deduction where business use falls below 63. Article 27 of the Sixth Directive, which a certain threshold. Yet the directive speci- forms part of Title X V ('Simplification fically incorporates provisions allowing procedures'), contains two procedures for Member States to ignore non-deductible the authorization of measures derogating VAT for the purposes of Article 17 where from the directive, both of which are in the amount thereof is insignificant (Article principle capable of applying to the 17(5)(e)) and to refuse to refund or carry contested national legislation. forward an excess of input tax over output tax where the amount of the excess is insig- nificant (Article 18(4)). I consider that, in view of the clear, albeit rather complex, mechanism laid down in the directive and the absence of any similar de minimis 64. Article 27(5) provides that: provisions allowing Member States to refuse the right of deduction in cases of limited private use, there are no grounds for construing Article 17 as implicitly containing such a rule. That view is 'Those Member States which apply on 1 supported by the text of the abovemen- January 1977 special measures of the type tioned Council decision of 28 July 1989, in referred to in paragraph 1 above may retain which the Council, 'by way of derogation them providing they notify the Commission from the provisions of Article 17(2)', of them before 1 January 1978 and permitted France to refuse to allow providing that where such derogations are deduction in cases where private use designed to simplify the procedure for exceeded 9 0 % . Moreover, as I shall explain charging tax they conform with the later, Article 27(1) of the Sixth Directive, requirement laid down in paragraph 1 under which that decision was adopted, above.'

70. Consequently, it is not, strictly speaking, necessary to consider whether such a 67. As regards Article 27(1), it is apparent measure would be capable of authorization from the German Government's reply to the under Article 27(1). However, if that Court's written question that it did not seek provision were to constitute an appropriate authorization under that provision because, basis for authorizing national rules such as in its view, the contested legislation does those at issue in the main action, this would not derogate from the directive. As I have support the view that such rules should be explained, I consider that view to be regarded as derogating from Article 17, as I incorrect. consider to be the case. I will therefore

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that it ensures that the Community auth- any such derogation does not lead to orities and the Member States are kept fully distortion of competition. In my view, informed of measures to be taken. Member States may not rely on that sentence to justify national rules which do not merely replace the output tax mechanism with a restriction on the right to deduct input tax, but which also prevent the deduction of input tax incurred on genuine business expenditure.

75. Reference should also be made to the last sentence of Article 6(2) of the Sixth Directive which, as I have already 77. Notwithstanding the fact that the mentioned, permits Member States to Commission, as long ago as 25 January derogate from the private use mechanism 1983, submitted to the Council the laid down in that paragraph, provided that abovementioned proposal for a Twelfth

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Directive with a view to harmonizing retention of a general measure, applicable to disallowable expenditure, the Council has all categories of expenditure, designed to not yet acted. overcome the administrative difficulties of verifying whether there was genuine business use in marginal cases.

79. Moreover, as a measure derogating from a fundamental principle of the 82. In my view, a measure such as the common VAT system, namely the right of German rule may not be based on either of deduction, Article 17(6) falls to be strictly these provisions. Article 20(4) applies solely construed. In my view, therefore, Article to adjustment under Article 20 of 17(6) was not capable of justifying the deductions which have already been made

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and does not concern the general right of simplifications to justify a measure limiting a deduction under Article 17. The German person's right of deduction. Article 22, measure is intended to remedy difficulties which is entitled 'Obligations under the arising from the application of the general internal system' and is contained in Title right of deduction under Article 17(2) XIII (Obligations of persons liable for rather than from the capital goods payment'), is confined to the administrative adjustment rules enacted under Article and accounting obligations incumbent upon 20(2). Secondly, with regard to the proviso taxable persons. Thus, the 'other obli- concerning administrative simplifications, a gations' which Member States may impose Member State may not rely on a provision under Article 22(8) are limited to obli- empowering it to permit administrative gations of that type.

Conclusion

83. Accordingly, I am of the opinion that the questions referred by the Munich Finance Court should be answered as follows: