C-4/94

BLP GROUP

OPINION OF ADVOCATE GENERAL LENZ delivered on 26 January 1995 *

A — Introduction had refused the application on the grounds that the services had been used for an exempt transaction, which precluded the deduction of input tax. The questions referred to the Court therefore relate to the conditions for and terms of the right to deduct input tax.

1. The Queen's Bench Division of the High Court of Justice for England and Wales has asked the Court for a preliminary ruling on the interpretation of some provisions of the 3. That right is one of the essential features First Council Directive 67/227/EEC of of the common system of value added tax set 11 April 1967 on the harmonization of legis­ out in Article 2 of the First Directive. The lation of Member States concerning turnover second paragraph of that article states: taxes 1 ('the First Directive') and the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes — common system of value added tax: uniform basis of assessment 2('the Sixth Directive').

'On each transaction, value added tax, calcu­ lated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components. ' 3

2. The case before the High Court concerns an application by the British company BLP Group pic ('BLP') to deduct from the VAT payable on its taxable transactions certain amounts of VAT on fees for services invoiced to BLP in connection with the sale of shares in a company. The competent tax authorities 4. That provision is fleshed out by Article 17 et seq. of the Sixth Directive. Article 17 states:

5. Article 19 provides inter alia:

'(1) The proportion deductible under the first subparagraph of Article 17(5) shall be (5) As regards goods and services to be used made up of a fraction having: by a 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, only such proportion — as numerator, the total amount, exclusive of the value added tax shall be deductible as of value added tax, of turnover per year is attributable to the former transactions. attributable to transactions in respect of which value added tax is deductible under Article 17(2) and (3),

This proportion shall be determined, in accordance with Article 19, for all the trans­ — as denominator, the total amount, exclu­ actions carried out by the taxable person. sive of value added tax, of turnover per

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BLP GROUP

year attributable to transactions included able supplies of goods or services). Under in the numerator and to transactions in the special method, the input tax is appor­ respect of which value added tax is not tioned on the basis of the ratio of the value deductible. The Member States may also of taxable transactions to total transactions. include in the denominator the amount The value of incidental financial transactions of subsidies, other than those specified in is left out of account in the calculation, how­ Article 11A(1)(a). ever, and the input tax on those transactions is attributed to them directly.

6. It appears, moreover, from the order for 9. In 1989 BLP bought the share capital 4of reference that BLP and the competent tax a German company by the name of Berg authorities (Commissioners of Customs and Mantelprofilwerk GmbH ('Berg'). Excise, 'the Commissioners') have agreed a special method for determining the deduct­ ible portion of input tax on goods or services 4 — In the German text the terms Anteile or Gesellschaftsanteile which have not been wholly used in making will be used for these shares, in line with the terminology of the Sixth Directive (see Article 13 B(d)(5) (on the meaning of taxable supplies of goods or services and which, sec paragraph 24 below)). Those arc collective terms for all shares in companies or partnerships, other than have not been wholly used in making exempt Aktiengesellschaften. They thus cover inter alia shares in supplies of goods or services (or in carrying German private limited companies (GmbH). The German law on such companies (Reichsgesetzblatt 1898, p. 846, as on any activity other than the malung of tax­ later amended) describes such shares as Gesellschaftsanteile.

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OPINION OF MR LENZ — CASE C-4/94

10. In May 1991 the directors of BLP received by it was £ 45 975. The Commis­ decided in view of the company's poor sioners allowed BLP to deduct £ 6 120 as financial position that the shares in Berg relating to services rendered before the deci­ ought to be sold. In June 1991 BLP sold sion to sell the shares, which were thus part 95% of those shares. The income from the of BLP's general operating costs. The Com­ sale was used to discharge BLP's indebted­ missioners refused to allow BLP to deduct ness to its bankers. the remaining £ 39 845 on the grounds that it related to services provided in connection with the sale of the shares and that the sale of shares was an exempt supply for VAT purposes, in respect of which no input tax could be deducted.

I-988

BLP GROUP

Directive incorrectly. It conceded that the ponents of the exempt supply does not con­ points of Community law raised in the stitute VAT borne directly by the cost com­ appeal would alone determine the outcome ponents of the taxable person's taxable trans­ of the appeal. actions.

16. According to BLP, in applying Articles 18. Before the hearing of the appeal, BLP 17 and 19 of the Sixth Directive and in par­ had applied for a reference to be made to the ticular in interpreting the phrase 'for the pur­ Court of Justice for a preliminary ruling poses of his taxable transactions' in Article under Article 177 of the Treaty. The High 17(2), attention must not be focused on the Court refused the application. BLP appealed immediate transaction in which BLP (by against that decision to the Court of Appeal, selling the Berg shares) made a taxable sup­ which upheld the appeal and remitted the ply. Instead, in the interests of fiscal neutral­ matter to another judge of the High Court, ity, the focus must be the wider purpose of on the ground that the High Court had not that supply, namely the discharge of BLP's fully observed the guidelines for the applica­ bank debts. The sale of the shares represents tion of Article 177 of the EC Treaty laid an incidental financial transaction, which was down by the Court of Appeal in Buhner v part of BLP's overall strategy in the conduct Bollinger. 6 The High Court thereupon of its core business and the making of its tax­ referred the following questions to the able supplies of goods or services. Court:

19. Written and oral observations on all or some of the questions were made by BLP, the United Kingdom, the Hellenic Republic and the Commission.

(c) services used for both exempt and taxable transactions such that the input tax thereon is deductible in accordance with Article 17(5) of the Sixth Directive? 20. In its observations the Commission pref­ aced its actual discussion of the questions referred for a preliminary ruling with exten­ sive remarks on the problem of whether the sale of the shares falls within the scope of the Sixth Directive at all. If that is not the case, in the Commission's view, the question of (2) If the answer to question 1 is that (c) deductibility does not arise. If, on the other applies and if a Member State has, in the hand, the transaction comes under the Sixth exercise of its discretion under Article Directive, in that the sale of the shares con­ 17(5) of the Sixth Directive, adopted a stitutes a supply of services for consideration special method falling within Article in favour of BLP's subsidiaries, the deduct­ 17(5)(c) for determining the amount of ibility of the input tax must be assessed in the input tax which can be deducted, accordance with Article 17 of that directive. does Article 19 of the Sixth Directive Which of those two possibilities is correct

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BLP GROUP

depends, in view of the Polysar judgment, B — Opinion on whether BLP carried out the sale for its own purposes, namely in its capacity as a 'holding' company, or in its capacity as a 'management' company, in connection with and as part of the totality of management and other services supplied by it to its sub­ The subject-matter of the first question sidiaries for consideration. That question must be examined in the light of the actual facts and the applicable national law.

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OPINION OF MR LENZ — CASE C-4/94

deduction in accordance with the principle The answer to the first question laid down in Article 17(2)(a) of the Sixth Directive, can nevertheless be deducted in view of the particular situation in this case. According to the argument put forward by BLP before the High Court, which that court refers for examination by this Court, there is a right to deduct input tax here, 27. I. According to BLP's main argument in because there is a link between the exempt support of its theory, set out in detail in its transaction (the sale of the shares) and the written observations, the phrase 'for the pur­ taxable transactions (the core business of poses of his taxable transactions' in Article BLP): the former, as the first question states, 17(2) of the Sixth Directive must be given a wide interpretation. Regard should be had not to the (exempt) transaction which has been directly served by the service, but to the taxable person's principal activity (here the taxable transactions), if, as in this case, the discharge of indebtedness brought about by the exempt transaction is for the benefit — was treated as an 'incidental financial of that activity. transaction'

28. (a) In support of that view, BLP argues — whose purpose and result was to raise primarily that the Community provision on money to discharge all of the taxable per­ VAT does not require the cost component on son's indebtedness. which input tax has been paid to be directly incorporated in the finished product. BLP thus relies on the system laid down by the Community rules on VAT with reference to the deduction of input tax. The above argu­ ment, including the details put forward in its support, must therefore be considered in the context of that system.

tax on consumption exactly proportional to as input tax must have been 'borne directly the price of the goods and services, whatever by the various cost components'. the number of transactions which take place in the production and distribution process before the stage at which tax is charged. In order for the 'number of transactions which take place in the production and distribution process before the stage at which tax is charged' not to influence the amount of VAT ultimately due to the revenue authorities, 32. Article 17 et seq. of the Sixth Directive Article 2(2) of the First Directive introduces lays down specific rules on the deduction of the mechanism of deduction of input tax. input tax, in so far as relevant here, in two respects. Firstly, those articles take account of the circumstance that the Community leg­ islature has in Article 13 et seq. exempted certain transactions from VAT. Input tax in respect of exempt transactions is not deduct­ ible in the common system of value added 30. A consideration of those provisions tax, because in such a case the taxable person together shows that the Community legisla­ acts as the final consumer, since he is unable 10 ture, proceeding from an ideal image of to pass the VAT onto third parties. Sec­ 'chains of transactions' — to adopt the neat ondly, Article 17 et seq. takes account of the phrase used at the hearing by the representa­ fact that some goods and services are by tive of the United Kingdom —, intended to their nature to be attributed to several trans­ attach to each transaction only so much VAT actions of the taxable person, and that attri­ liability as corresponds to the added value bution may relate to the group of taxable accruing in that transaction, so that there is transactions and the group of exempt trans­ to be deducted from the total amount the tax actions at the same time. which has been occasioned by the preceding 9 'link in the chain'.

34. It follows that, subject to divergent rules such as those in Article 17 et seq. of the Sixth Directive, the different types of transactions by the taxable person must be distinguished as clearly as possible. In particular, as follows from the system which has been demon­ 36. With respect to the present case, the strated, in applying Article 17(2)(a) goods or High Court found, as mentioned above, that services which have been identified as cost the services in question on which input tax components of a specific exempt supply of had been paid were 'used for [an] exempt goods or services cannot be attributed to 1 transaction' by the taxable person, 1since other supplies of goods or services which are those services, according to the relevant subject to VAT. The term 'purposes' in Arti­ invoices, had been 'supplied in connection cle 17(2) must be interpreted in that light. with the disposal of the shares in Berg'. 12 It That term therefore does not permit the clear is thus established that those services form a distinction between taxable and exempt cost component precisely of the exempt sup­ transactions to be blurred on the basis of ply (effected by the sale of the shares). considerations which are outside the system.

37. That is not affected by the argument put forward by BLP at the hearing that the costs 35. That conclusion is confirmed firstly by of the services on which input tax has been Article 17(5) of the Sixth Directive. That paid (and hence that input tax itself) are ulti­ provision, without employing the word 'pur­ mately incorporated into the price of the poses', speaks merely of goods or services goods and services which it sells by means of 'used ... for transactions'. In the context of that provision, however, the same criteria — naturally — as in Article 17(2) apply for the attribution of goods and services on which 11 — See the wording of the first question and paragraph 25 above. input tax has been paid. Secondly, the above 12 — See paragraph 8 of the schedule to the order for reference conclusion is confirmed by Article 17(3). and paragraph 11 above.

38. On the basis of that attribution, the right to deduct input tax is excluded in the present case, it being of no relevance whether the sale of the shares was for the benefit of the taxable activity of the taxable person on the 40. All those considerations apply indepen­ basis of the discharge of indebtedness dently of whether the exempt transaction intended and effected. belongs to the essential object of the taxable person's undertaking or not. Contrary to what BLP appears to think, I thus see no dis­ tinction between the present case and the case of a taxable person whose essential trad­ ing activity comprehends both exempt and 39. That conclusion is confirmed if one — taxable transactions and who makes exten­ so to speak, as a check on what has been said sive use of exempt transactions in order to above — classifies the abovementioned oper­ raise funds for the part of his activity which 1 ation (that is, by means of a transaction relates to the taxable transactions. 4 funds are raised for the benefit of the taxable activity of the person in question) in the VAT system. Under Article 2(1) of the Sixth Directive, supplies of goods and services are subject to VAT only if they are effected 'for consideration'. That presupposes that there is a consideration (see Article llA(l)(a) of the Sixth Directive) which can be expressed in 1 money. 3In the reality of business life it is 41. Before I conclude this section on the system of the provisions on VAT, I must also

13 — Judgment in Case 154/80 Staatssecretaris van Fmaiiaen v Coöperatieve Aardappelcnbewaarplaats [1981] ECR 445, paragraph 13; judgment in Case 230/87 Naturally Yours Cosmetics v Commissioners of Customs and Excise [1988] 14 — On the meaning of incidental financial transactions' in this ECR 6365, paragraph 16. connection, sec paragraphs 52 to 54 and 62 to 64 below.

15 — See paragraph 27 above. 16 — See the first to third and eighth recitals. They state essen­ tially that in view of the defects of the value added tax leg­ islation 'at present' in forcej harmonized rules are to be introduced which will not distort conditions of competi­ tion. 17 — Judgment in Case 268/83 Rompelman v Minister van Fi- 44. It therefore follows from the system of nanciën [1985] ECR 655. BLP relied on that judgment in particular before the national court: see paragraph 17 of the the common rules on VAT that in the schedule to the order for reference. present case the input tax in question cannot 18 — Judgment in Case C-333/91 Sofitam v Ministre chargé du Budget [1993] ECR I-3513. BLP relied on this judgment in be deducted. its written observations.

I-996

BLP GROUP

'the deduction system is meant to relieve the trader entirely of the burden of the VAT 48. That approach is consistent with the payable or paid in the course of all his eco­ Rompelman and Sofitam judgments relied on nomic activities' by BLP. The Rompelman judgment con­ cerned the question whether the acquisition of a real property right which is the neces­ sary precondition for its exploitation (the exploitation being subject to VAT) is already part of the economic activity within the meaning of Article 4(1) of the Sixth Directive and that if (at the time of assessment) that exploita­ tion is intended, but has not yet commenced. The Court's answer was that in principle it was. In the Sofitam case the Court had to

19 — Nor are they cither, moreover, for an undertaking's opera­ 'the common system of VAT consequently tional purposes, since the income from the sale of shares is ensures that all economic activities, whatever part of the undertaking's own resources, whereas the loan is part of its borrowed resources. their purpose or result, provided that they

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OPINION OF MR LENZ — CASE C-4/94

are themselves subject to VAT, are taxed in a 53. In my opinion, it does not. wholly neutral way.'

52. II. I must also, as a precaution, address 55. III. For all those reasons, the national the question whether the classification of the court's first question is to be answered in the sale of the shares as an 'incidental financial sense set out in alternative (a), since in a case transaction' leads to a right to deduct the such as the present one the services on which input tax in question here. input tax is charged are to be regarded as being used for the purposes of an exempt transaction, so that the input tax cannot be 20 — Rompelman, paragraph 19, and Sofitam, paragraph 10. deducted.

I-998

BLP GROUP

62. In the event that Article 19 applies to the 59. The answer follows clearly, in my opin­ determination of the amount of deductible ion, from the wording of Article 17(5). input tax, the High Court asks whether Arti­ While the second subparagraph of that pro­ cle 19(2) allows deduction in full of the input vision provides for the application of Article tax by excluding the sale of shares when cal-

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OPINION OF MR LENZ — CASE C-4/94

culating the deductible proportion of input 64. That provision must be seen in the light tax under Article 19(1) as being an 'inciden­ of the fact that the incidental transactions tal financial transaction'. referred to there may constitute a large part of the total transactions, without however making any significant contribution to the overheads. In those circumstances it would be inappropriate to include the incidental transactions in the calculation of the propor­ tion under Article 19(1). Instead those trans­ 63. If, in accordance with the premise — which, as I have said, is incorrect — on actions are 'excluded' in accordance with which the question is based, the present case Article 19(2). If, then, apart from the inci­ were regarded as a case of mixed use, in that dental transaction in question, all the taxable the costs of advice in question were (as over­ person's transactions are subject to VAT, the heads) used both for taxable transactions and result is a proportion of 1: 1 under Article for an exempt incidental financial transac­ 19(1). The input tax is then deductible in full. tion, the input tax would be deductible The third question would have to be under Article 19(2). answered to that effect.