C-305/97

'Where goods and services are used for the purposes of his undertaking, the taxable person shall be authorised to deduct from 2. It is apparent from the reference for a the tax for which he is liable: preliminary ruling that one of the litigants in the main proceedings has submitted a claim to deduct VAT in respect of a period dating back to 1973, when the Second Directive 67/228/EEC 1was in force. Like the Sixth Directive 77/388/EEC 2to which the other appellant companies refer, the Second Directive is therefore part of the relevant Community legislation. (a) the value added tax invoiced to him in respect of goods supplied to him or in respect of services rendered to him; * Original language: French. 1 — Council Directive 67/228/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes — Structure and procedures for application of the common system of value added tax (OJ, English Special Edition 1967, p. 16, hereinafter 'the Second Direc- tive'). 2 — 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 (OJ 1977 L 145, p. 1, herein- 5 after 'the Sixth Directive').

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4. Article 11(4) provides however: deduct from the tax which he is liable to pay:

(a) value added tax due or paid within the 'Certain goods and services may be exclu- territory of the country in respect of ded from the deduction system, in particu- goods or services supplied or to be lar those capable of being exclusively or supplied to him by another taxable partially used for the private needs of the person; taxable person or of his staff.'

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7. Article 1 of the Sixth Directive provides motor cars has been prohibited in the that the laws, regulations and administra- United Kingdom since 1973 under a suc- tive provisions adopted by the Member cession of statutory instruments ('the Cars States in order to modify their VAT systems Orders'). in accordance with the Sixth Directive were to enter into force by 1 January 1978 at the latest.

11. Article 4 of the VAT (Cars) Order 1972, cited by way of example by the 8. On 25 January 1983 the Commission national court, provides as follows: submitted to the Council a Proposal for a Twelfth Directive on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: expenditure not eligible for deduction of value added tax, 4which was amended by another proposal submitted by 'Tax on the supply or importation of a the Commission to the Council on 20 Feb- motor car shall not be deducted as input ruary 1984. 5The Council did not adopt tax ... except where: that proposal.

9. A new proposal for a directive was (a) the supply is a letting on hire; or submitted by the Commission on 17 June 1998. 6

(b) the motor car is supplied or imported for the purpose of its conversion into a vehicle which is not a motor car; or II— The national provisions

IIΙ — The facts and the national proceed­ 15. Allied Domecq pic (hereinafter ings 'Domecq') is a representative member of a VAT group of taxable persons, some mem­ bers of which carry on brewing, and food, wine and beer retailing businesses. They employ travelling salesmen and technical 12. There are three sets of appellants in the operatives who use motor cars in order to main proceedings. perform their duties and travel a consider­ able number of miles per year for that purpose. The group purchases standard vehicles, known as 'need cars', for its employees' business use. The latter may also have a reasonable amount of private 13. Royscot Leasing Ltd and Royscot use of the cars outside their working hours. Industrial Leasing Ltd (hereinafter 'the They have to pay a fee for that private use, Royscot companies') carry on a leasing which is therefore a taxable transaction, business whereby they purchase cars and the price of which includes VAT. lease them on to their customers at a rent which includes VAT. They do not take physical possession of the cars, which are delivered by the manufacturer directly to the lessees. It is therefore not possible for the Royscot companies or their employees to make any private use of the cars.

20. The parties appealed to the VAT and Duties Tribunal but their appeals were unsuccessful. After the High Court of 2. In particular, may the right to deduct Justice had also dismissed their appeals, be excluded: they lodged a further appeal with the Court of Appeal.

(a) even though the cars are essential tools of the business in the sense that the business by definition would not exist without the cars (e.g. the car-leasing business of the IV — The national court's questions Royscot companies, and the car- leasing and car-hire businesses of the T.C. Harrison Group) ?

21. According to the Court of Appeal, the sole issue is whether the Second and Sixth Directives confer on the appellants a right of deduction which overrides the prohibi- (b) even though the cars are never tion in the Cars Orders. Taking the view available for any private use by that the relevant provisions of those direc- the taxable person or his staff (e.g., tives were neither clear nor unequivocal, the car-leasing businesses of the the Court of Appeal stayed the main Royscot companies and of the T.C. proceedings and submitted the following Harrison Group)?

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(c) even though the taxable person able person charges the employee a could not carry on his business at fee for that use? all without the cars (e.g., "demon- strator" cars acquired by a member of the T.C. Harrison Group in his dealership business) ?

24. The provision at issue was Article 237 expenditure', that '... the rules which the of Annex II to the French Code General des Council is called upon to adopt are not Impôts ('the CGI'), which provided as automatically limited to expenditure which follows: 'Value added tax shall not be is not strictly business expenditure'. 9 deductible on vehicles or machines, what- ever their nature, designed for the transport of persons or for mixed use which consti- tute fixed assets or, if not, are not intended for resale in a new state.' 29. The Court went on to hold that the expression 'all the exclusions', used in the second subparagraph of Article 17(6), which provides that 'until the rules [which the Council must adopt] come into force, 25. The basic documentation of the French Member States may retain all the exclu- tax authority stated that the vehicles refer- sions provided for under their national laws red to in that provision included private when this Directive comes into force', motor cars. includes 'expenditure which is strictly busi- ness expenditure'. 10

26. The Commission took the view that, on that point, the CGI was contrary to the 30. Finally, the Court clearly stated that principle — which it considered to be 'that provision ... authorises the Member fundamental — of the right to deduct States to retain national rules which deny VAT on a means of transport which con- taxable persons the right to deduct VAT on stitutes the very object of a taxable person's means of transport which constitute the trade. very tool of their trade'. 11

35. In reaching that conclusion and in finding that the Member State concerned had not failed to fulfil its obligations, the Court implicitly but necessarily accepted that the national legislation in question The first and fourth questions could lawfully be retained after the expiry of the four-year period provided for in the first subparagraph of Article 17(6). That legislation was still in force in 1996, when 32. By its first question the Court of Appeal the application was lodged, whereas the is asking whether Article 11(4) of the four-year period, which began to run on Second Directive authorised Member States 1 January 1978, the date of the entry into to adopt or retain legislation excluding force of the Sixth Directive, had expired on such a right of deduction. Similarly, by its 1 January 1982. first and fourth questions, it wishes to ascertain whether Article 17(6) of the Sixth Directive authorises the Member States to retain legislation of that kind beyond the four-year period following the entry into 36. That decision follows from the very force of the Sixth Directive. wording of the provision. The period of four years is effective against the Council alone and not against the Member States, it being the period within which the Council must determine the expenditure which does not give rise to a right of deduction. It was 33. The latter point should be considered not fixed in order to impose a limit on the first, since in its judgment in Commission ν time by which the Member States were to France, cited above, the Court provided abandon the measures which they had valuable guidance as to the interpretation adopted whereby the right of deduction to be given to Article 17(6). was excluded.

38. There is, admittedly, a link between the expenditure was not deductible, would right to retain national legislation and the facilitate fraudulent conduct by permitting period within which the Council must act, taxable persons to deduct, without valid since, by adopting its decision, the Council reason, all sorts of private expenditure puts an end to the national measures. from their taxable transactions. However, the Council's failure to comply with that time-limit cannot curtail the freedom given to the Member States to retain their own systems, since the wording of the provision does not lay down any time-limit which expressly restricts the 42. The Court has therefore held that the period during which the national legislation Community legislature linked the duration is to be valid. of the authorisation given to the Member States not to the expiry of the four-year period laid down in the first subparagraph but rather to the actual entry into force of the rules which the Council, despite the expiry of that period, must still adopt. 39. The objectives pursued by Article 17(6) of the Sixth Directive, and the structure of the system which the Directive establishes, support this strictly literal construction.

43. The four-year period provided for in the first subparagraph cannot therefore be relied upon as against the Member States. 40. The 12th recital in the preamble to the Sixth Directive states that harmonisation of the rules governing deductions is one of the Directive's objectives. However, the 17th recital nevertheless accepts that the Mem- ber States are to have the right, within 44. Not only does the Court's judgment in certain limits and subject to certain condi- Commission v France give guidance as to tions, to retain special measures derogating the scope of the authorisation given to the from the Directive in order to avoid fraud Member States, but it also gives very or tax avoidance. specific guidance on the nature of the expenditure which they may exclude from the right of deduction under Article 17.

46. The Court expressly declined to distin- lature to adopt legislation authorising the guish between means of transport for retention of rules in both cases. 13 private use and other means. On the basis of the wording of the second subparagraph of Article 17(6) the Court held that the expression 'all the exclusions' — which refers to exclusions which the Member States may retain in regard to the deduction of certain expenditure — includes 'expen- diture which is strictly business expendi- ture'. 12 49. This same concern underlies the absence of a distinction by reference not to the use which may be made of the means of transport in question but to the nature of the economic activity. Under Article 17(6) as interpreted by the Court, it is irrelevant that cars purchased by a taxable person are used for a business which does not lend 47. A distinction made so as to allow itself to any risk of their being used for deduction of VAT on goods for business private purposes. use alone could, however, be justified by the desire to limit the harm to the neutrality of VAT which ensues from any exclusion of the right of deduction. To deny a trader the right to deduct VAT is in effect tantamount to acceptance of a cumulative effect of the tax, contrary to the very principle under- lying VAT, namely to impose taxation solely on the added value created at a given stage of the production process. 50. The relevant legislation, as interpreted by the Court, therefore reflects the Com- munity legislature's concern to avoid sacri- ficing the Member States' financial interests to the needs of the proper working and neutrality of the common system of VAT, at least until they have agreed on the cate- gories of expenditure which are not to give 48. However, the Member States' concern rise to the right to deduct VAT. that, owing to the difficulty of carrying out effective controls, they would be unable to ensure observance of the dividing line 13 — It is significant that the Commission's 1983 Proposal, which had suggested the principle of excluding the right to between cars used exclusively for business deduct VAT in respect of 'expenditure on the purchase, purposes and cars used for mixed business manufacture, importation, leasing or hire, use, modifica- tion, repair or maintenance of passenger cars ...' (Arti- and private use led the Community legis- cle 1(1)) was not found by the Council to be adequate from that point of view. It is true that Article 1(2) of the Proposal stated that exceptions were to be made in regard to vehicles used for carriage for hire or reward, for driving training or instruction, hired out, and vehicles which are 12 — Ibidem. part of the stock in trade of a business.

52. That right is not, however, limitless, 55. However, as will be seen, the rules laid since Article 17(6) of the Sixth Directive down by the Second Directive also leave a lays down a 'standstill' clause, freezing the broad margin of discretion to the Member national rights in force in the relevant area States. as at 1 January 1978, the date on which the Sixth Directive entered into force. 14 It does not therefore allow the Member States to increase, after that date, the burden upon traders resulting from the denial of the 56. Let me point out, first of all, that the right of deduction. obligation to comply with the Second Directive naturally raises the question of the interpretation of Article 11(1) and (4) of that directive for purposes other than the simple determination of the rules applic- able to taxable transactions arising during 53. Likewise, if those exclusions are to be the period in which it was in force. maintained, it does not suffice that the national rules were applicable when the Sixth Directive entered into force on 1 Jan- uary 1978. They must also be in accor- dance with the provisions of the Second 57. Article 11(1)(a) lays down the principle Directive, which continued to be effective that a taxable person may deduct the VAT in each Member State until the entry into invoiced to him in respect of goods and force of the Sixth Directive.15 services used for the purposes of his under- taking. Article 11(4) provides that certain goods and services may be excluded from the deduction system, in particular those capable of being used exclusively or par- tially for the private needs of the taxable 54. It cannot be accepted that the conse- person or of his staff. quence of the entry into force of the Sixth Directive, one object of which is to harmo- nise the rules governing deduction of VAT,16 should be to allow a Member State to retain national rules that are contrary to 58. The Member States may therefore take account of the very nature of the goods or 14 — See point 7 above. 15 — Article 37 of the Sixth Directive. 16 — Twelfth recital. 17 — Third recital.

61. For all those reasons, use of a test based on the nature of the goods appears appro- 65. Whether the cars are of the type priate in the present case, having regard to belonging to the Royscot companies or to the type of goods with which the main the members of Harrison, which the proceedings are concerned. national court classified as essential tools of their business, the demonstration cars of the members of Harrison, without which, according to the national court, they can­ not carry on their business, or cars of 62. It therefore follows that, in my view, members of Domecq, without which the private cars fall within the category, co- taxable person's employees could not per-

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form their duties, those types of motor cars which are not absolutely essential for the are clearly means of transport which con- operation of his business'. 19 stitute the very tool of the taxable person's trade, as understood by the Court of Justice.

69. Consequently, by the expression 'the very tool' of the taxable person's trade, which the Court used in order to charac- 66. The fact that they are not a mere tool terise the means of transport in respect of but an indispensable instrument for carry- which the right to deduct VAT may also be ing on the business of the undertaking has denied, the Court was referring to goods no bearing on the breadth of the Court's without which the undertaking's business interpretation of Article 17(6), second sub- would be jeopardised, in other words goods paragraph, under which authorised exclu- which were an indispensable tool of the sions may include expenditure which is taxable person's business. strictly business expenditure.

73. The third question concerns the effect which an apportionment of expenditure on vehicles between their business use and their private use may have on the right of deduction. It also concerns the effect which 76. In particular, there are valid grounds the employee's private use of vehicles has for regretting that where the vehicles are where use is in the form of a taxable, directly used in the business of the taxable transaction. However, it follows from the person with no possibility of his taking foregoing that the Member States are physical possession of them, as in the case entitled to retain rules denying the right to of leasing transactions, the exclusion of the deduct VAT, whatever the use to which the right of deduction is not prohibited. For in motor cars are put. Since the third question such a case neither the taxable person nor is therefore devoid of purpose, I do not his staff can use the vehicles for private use, consider it necessary to answer it. so that the risks of tax evasion are insig­ nificant.

74. The interpretation which I have pro- posed that the Court should adopt follow- ing its judgment in Commission ν France appears to me to be the only possible interpretation as the applicable Community 77. However, like Advocate General law now stands, even if not the best. As the Jacobs, I consider that 'the problem calls Court has observed, the wording of Arti­ for a legislative solution'. 2 2In the first cle 17(6), and the absence of any agree­ place, the applicable Community legisla­ ment between the Member States on the tion, which is unequivocal on the point in arrangements applicable to expenditure on question, does not lend itself to a selective passenger transport, requires the adoption interpretation, even if that were justified on of that approach so long as the Council has grounds of expediency. In the second place, failed to determine those rules. 20

1. Article 11(4) of the Second Council Directive 67/228/EEC of 11 April 1967, on the harmonisation of legislation of Member States concerning turnover taxes — Structure and procedures for application of the common system of value added tax, authorised the Member States to adopt or retain in force legislative provisions which excluded the right to deduct value added tax in respect of motor cars used for a taxable person's business.

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Article 11(4) of the Second Directive 67/228 did not preclude the Member States' right to adopt or retain in force legislative provisions which excluded the right to deduct value added tax in respect of motor cars used for the taxable person's business:

— where those vehicles were an indispensable tool of that business;

— where those vehicles were not capable of being used for private purposes.

— where those vehicles are not capable of being used for private purposes.

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