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and services, shall be chargeable after 5. Article 5 defines supplies of goods. deduction of the amount of value added Under Article 5(1), a supply of goods tax borne directly by the various cost means the transfer of the right to dispose components.' 4 of tangible property as owner. The remain- der of the paragraphs of that article pro- vide, essentially, positive definitions of what is or may be considered to be a supply and what is or may be considered to be tangible property. The latter may include, under Article 5(3), certain interests in and rights over immovable property. In 3. The deduction system is designed to addition to those positive definitions, how- avoid a cumulative effect where VAT has ever, Article 5(8) provides: also been levied on goods and/or services used in order to produce those supplied — that is to say, to avoid VAT being levied anew on VAT already charged. By its operation, a chain of transactions builds up, in which the net amount payable in respect of each link is a specified propor- tion of the value added at that stage. When 'In the event of a transfer, whether for the chain comes to an end, the total amount consideration or not or as a contribution to levied will have been the relevant propor- a company, of a totality of assets or part tion of the final price. thereof, Member States may consider that no supply of goods has taken place and in that event the recipient shall be treated as the successor to the transferor. Where appropriate, Member States may take the necessary measures to prevent distortion of competition in cases where the recipient is 4. Under Article 2 of the Sixth Directive, 5 not wholly liable to tax.' a supply of goods or services effected for consideration by a taxable person acting as such is subject to VAT. According to Article 4(1), a taxable person is a person who carries out an economic activity, whatever the purpose or result of that activity. Economic activities include, under Article 4(2), the exploitation of tangible or 6. Under Article 6(5), Article 5(8) applies intangible property for the purpose of in like manner to the supply of services. obtaining income therefrom on a continu- ing basis.

definition of a supply of goods (and, by that 'only such proportion of the value virtue of Article 6(5), of a supply of added tax shall be deductible as is attribu- services) and not in the list of exemptions table to the former transactions' and 'this from VAT which are contained, except as proportion shall be determined, in accor- regards international trade, in Article 13. dance with Article 19, for all the transac- Article 13(A) lists exemptions for certain tions carried out by the taxable person'. activities in the public interest. Arti- Article 19 provides, basically, for deduc- cle 13(B) lists a number of other exempt tion of a fraction equivalent to turnover in transactions, including (a) insurance trans- VAT-deductible transactions divided by actions and (b) the leasing or letting of total turnover. immovable property, but Article 13(C) authorises Member States to allow taxpay- ers to opt for taxation for certain of those transactions, including (a) the leasing or letting of immovable property.

National implementing provisions 8. Deductions are governed by Articles 17 to 20.

11. The United Kingdom legislation pur- suant to Article 5(3) of the Sixth Directive 9. Article 17(2)(a) states: 'In so far as the treats the transfer of a major interest in goods and services are used for the pur- land as a supply of goods. In Scotland, poses of his taxable transactions, the tax- where the property in issue in the present able person shall be entitled to deduct from case is situated, the definition of a 'major the tax which he is liable to pay ... value interest' includes the lessee's interest under added tax due or paid in respect of goods or a lease for a period of not less than 20 services supplied or to be supplied to him years. by another taxable person.'

('the VAT Order'), 6under which, where a national court's order for reference and person transfers (a) his business or (b) part accompanying file and from the observa- of his business to another person as a going tions to the Court, are as follows. concern, the supply of the business assets is to be treated as neither a supply of goods nor a supply of services. In both cases, such treatment is subject to the condition that the transferee must use the assets for carrying on the same kind of business as the transferor and must be, or must imme- diately become, a taxable person. In the case of a transfer of part of a business, there is the further condition that the part must 15. Scottish Mutual Assurance pic ('Scot- be capable of separate operation. tish Mutual') is a wholly-owned subsidiary of Abbey National plc ('Abbey National'), which represents it for VAT purposes. It is partly exempt from VAT; in addition to its insurance business (which is exempt pur- suant to Article 13(B)(a)), it operates a commercial property-letting business, in 13. Finally, the United Kingdom has respect of which it has opted for taxation applied Article 13(B)(b) and (C)(a) of the in accordance with the United Kingdom Sixth Directive by making the grant of any rules implementing Article 13(C)(a). It thus interest in or right over land an exempt charges VAT on rents, and deducts from supply, but by allowing owners of commer- that VAT input tax incurred in running the cial property or of interests in commercial business. With regard to residual input tax property to waive the exemption in respect which cannot be attributed directly either of particular buildings. to taxable or to exempt transactions, the Abbey National group has agreed with the Commissioners of Customs and Excise ('the Commissioners') on an apportion- ment method in accordance with the Uni- ted Kingdom provisions implementing Arti- cles 17(5) and 19.

17. In connection with the transfer, how- ever, Scottish Mutual incurred professional fees on which VAT of GBP 4 365.04 was charged. Considering that sum to be input tax attributable to a transaction in the course of its taxable business, the company deducted it from its output tax. Following an assessment in 1994, the Commissioners took the view that the sale of Atholl House 19. Abbey National then appealed to the was a transfer of a going concern by English High Court which, on 2 November Scottish Mutual and as such not a taxable 1998, noting that the transfer was agreed supply to which input tax could be attrib- between the parties to be (contrary to the uted. A proportion of the VAT determined finding of the VAT Tribunal) a transfer of a by the agreed method of apportionment of going concern, and that the case involved a residual, non-attributable, input tax could matter of VAT law which was of wide- none the less be deducted. spread concern to the commercial property industry but on which the Court of Justice had not yet ruled, sought a preliminary ruling from the Court on the following questions:

18. Abbey National challenged the assess- ment before the VAT and Duties Tribunal, London, which dismissed its appeal in 1997. The Tribunal decided, essentially, that the right to deduct arises where goods or services are used for the purposes of, and '1. Having regard to the terms of Arti- are directly and immediately linked to, a cle 17(2) of the Sixth VAT Directive, taxable transaction; the transfer of Atholl do the words in Article 5(8) thereof House was not a taxable transaction and "the recipient shall be treated as the could thus not itself form the basis for a successor to the transferor" require

21. The three questions as formulated sug- gest three routes (favoured, it would seem, by Abbey National) by which a solution to 3. Where the economic activity of the the dispute might be reached. However, transferor prior to the transaction fall- they are not the only possible routes. A ing within Article 5(8) has been fully different analysis has been suggested by the taxable, is input tax deductible in Netherlands Government and by the Com- respect of a payment made in connec- mission. Therefore, whilst recognising that tion with the termination of that activ- the considerations engendered by the three ity?' questions specifically raised may play a role, I shall address more generally the question: 'Where a Member State has made use of the option in Articles 5(8) and 6(5), so that a transfer of a totality of assets or part thereof is treated as not being a supply of goods or services, is VAT on supplies 20. Written observations have been sub- received in order to make that transfer mitted by Abbey National, the United deductible by the transferor?'

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Purpose of Article 5(8) delicate juncture of a change of ownership. A Member State can easily avoid creating such difficulties by implementing Arti- cle 5(8), since the overall VAT burden on the business, and the overall amount levied 22. When interpreting Article 5(8) and by the revenue authorities, will not be applying it to circumstances such as those affected. of Scottish Mutual, it is helpful to bear in mind the purpose for which it was enacted.

7 — Second Council Directive 67/228/EEC of 11 April 1967 on 26. The transfer of 'a totality of assets', the harmonisation of the legislations of the Member States viewed in the context of a supply effected concerning turnover taxes — Structure and procedures for application of the common system of value added tax, OJ, English Special Edition 1967, p. 16 ('the Second Directive'). by a taxable person — one who carries on The predecessor to Article 5(8) of the Sixth Directive was a an economic activity — may be seen note regarding Article 5(1) in Annex A to the Second Directive, which read: 'In case of contribution to a company clearly to refer to the transfer of a business, of the whole or part of the contributor's assets, Member States may regard the benefiting company as the successor in its entirety, by means of a transfer of its in title of the contributor.' assets rather than of the shares in the 8 — Bulletin of the European Communities, Supplement 11/73. business.

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28. The solution adopted in the United Kingdom would appear to be a reasonable one: when assets representing a part of a business which is capable of separate operation are transferred in such a way that the transferred business continues as a going concern, the option exercised under Article 5(8) of the Sixth Directive applies Transfer of a totality of assets and no supply is deemed to have taken place. Those criteria do not appear to place any strain on the broad wording of the Community provision, and whether they are met in a particular case must thus remain a matter for the competent national court. 30. The simplest situation to consider, and that from which the treatment of other situations may be deduced, is that of the transfer of all the assets of a business which is engaged exclusively in making taxable supplies. 29. The circumstances of the present case involve a transaction which is said to qualify, within the definition applied in the United Kingdom, as a transfer of part of a totality of assets — in other words, of a self-standing part of a business. The fact that the transfer was not of the totality of 31. In order to be deductible, VAT must be borne by supplies (inputs) which are used for the purposes of the taxpayer's taxable 9 — And its equivalents in other languages — 'universalité transactions (outputs). This is clear from partielle de biens', 'Teilvermögen', 'gedeelte van een alge- meenheid van goederen', for example. the wording of Article 17(2), particularly

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It thus appears that the legislature deliber- ately chose wording intended to limit the scope of the right to deduct to the situation where inputs are used for the purposes of identifiable taxable transactions. 1 1 The principle that deductibility is dependent upon attributability is also inherent in the apportionment rules governed by Arti- cles 17(5) and 19. 33. That effect of exempt supplies was the basis of the approach followed by the Court in B LP. 13 A management and hold- ing company had sold 95% of the shares in a company which it owned, by an exempt transaction (transactions in shares are

plies. Their full cost, including the VAT right to deduct, 'the goods or services in levied on inputs, will — presumably — question must have a direct and immediate be reflected in the price charged. In that link with the taxable transactions' 14 and situation, there will be double or cumula- thus that 'where a taxable person supplies tive taxation, since VAT will be charged in services to another taxable person who uses full on an output one of whose cost them for an exempt transaction, the latter components already includes VAT. There person is not entitled to deduct the input is a potentially serious departure from the VAT paid, even if the ultimate purpose of principle on which VAT is levied in that a chain of supplies may be broken in this manner at more than one point, with a 12 — The Court has recognised that the terms used to specify the concomitant repetition of cumulative taxa- exemptions envisaged by Article 13 are to be interpreted strictly, since they constitute exceptions to the general principle that VAT is levied on all supplies made for consideration by a taxable person; see, for example, Case 348/87 Stichting Uitvoering Financiële Acties v Staatsse- 10 — Proposal for a Sixth Council Directive on the harmonisa- cretaris van Financiën [1989] ECR 1737, paragraph 13 of tion of legislation of Member States concerning turnover the judgment, and more recently, the judgment of 7 Sep- taxes — Common system of value added tax: uniform tember 1999 in Case C-216/97 Gregg v Commissioners of basis of assessment, OJ 1973 C 80, p. 1. Customs and Excise, paragraph 12. 11 — Cf. Case C-342/87 Genius Holding v Staatssecretaris van 13 — Case C-4/94 BLP Group v Commissioners of Customs and Financiën [19891 ECR 4227, paragraph 12 of the judg- Excise [19951 ECR I-983. ment. 14 — Paragraph 19 of the judgment.

35. The contrast between those two approaches may be more apparent than real. The reference to cost components in the BLP judgment is a reminder of the basic 34. However, in other cases the Court has principle set out in Article 2 of the First taken what appears to be a broader Directive: 'On each transaction, value approach. In Intiem,17 for example, it held added tax ... shall be chargeable after that the right to deduct input tax 'applies to deduction of the amount of value added goods and services connected with the tax borne directly by the various cost pursuit of the taxable person's business'; components.' Thus, what matters is whe- in Sofitam,18 it stated that 'the right to ther the taxed input is a cost component of deduct must be applied in such a way that a taxable output, not whether the most its scope corresponds as far as possible to closely-linked transaction is itself taxable. the sphere of the taxable person's business'; As the Commission submitted at the hear- and in Ghent Coal 19 it ruled that a taxable ing, 21 the conclusion to be drawn from the person acting as such is entitled to deduct BLP judgment is that the question to be VAT payable on supplies acquired for the asked is not what is the transaction with purpose of investment work intended to be which the cost component has the most used in connection with taxable transac- direct and immediate link but whether tions, even where, for reasons beyond the there is a sufficiently direct and immediate taxable person's control, those taxable transactions were never in fact carried out. Indeed, in BLP itself the Court also 20 — Paragraph 25 of the judgment. stated that if the company had raised the 21 — The position adopted by the Commission at the hearing differed from that presented in its written observations, in which it had argued, essentially, that VAT on inputs directly and immediately linked to a transfer deemed not to be a supply was not deductible. It had, it said at the 15 — Paragraph 28 and operative part of the judgment. hearing, been 'swayed by the lucidity' of the Netherlands 16 — Paragraph 24 of the judgment. Government's written observations. However, it may also be noted that a letter from the Commission to Abbey 17 — Case 165/86 Intiem v Staatssecretaris van Financien [1988] National's financial advisers, dated 26 February 1997 and ECR 1471, paragraph 13 of the judgment. contained in the file forwarded by the High Court, stated 18 — Case C-333/91 Sofitam v Ministre chargé du Budget that the use of the option in Article 5(8) 'may not lead to a [1993] ECR 1-3513, paragraph 11 of the judgment. difference in the fiscal treatment of the costs related to this transfer. Any other interpretation would be in contra- 19 _ Case C-37/95 Belgian State v Ghent Coal Terminal [1998] diction with the principle of the neutrality of the tax and ECR I-1, paragraphs 17 and 24 and operative part of the would be contradictory with the general principles of the judgment. See also Case C-110/94 Inzo v Belgian State VAT system.' [1996] ECR I-857, paragraphs 20 and 21.

38. However, it is not an exempt supply either. An exempt supply has the effect of breaking the VAT chain. There is no reason to consider that the chain is broken by a 36. The next point to be made is that the transaction in which 'no supply of goods transfer of a totality of assets in a Member [or services] has taken place'. On the State which has exercised the option in contrary, the stipulation that 'the recipient Article 5(8) is not a taxable transaction. I shall be treated as the successor to the agree in this regard with the view put transferor' stresses the continuity of the forward by both the United Kingdom situation from a VAT point of view. Government and the Commission at the Although — to pursue the metaphor — hearing, that no purpose is to be served by one link in the chain is deemed not to looking at the transfer as a transaction exist, the fact of that 'missing link' does not which would normally be taxable. Since it imply a break and a recommencement of must be deemed not to be a supply at all, it the chain but rather a sequential relation- ship between the links on either side of it. In addition, as I have reasoned, the treat- 22 — Set· paragraph 24 of the judgment. ment accorded to exemptions should be 23 — I agree here with the Opinion delivered on 30 September applied restrictively. Thus it is appropriate 1999 by Advocate General Saggio in Case C-98/98 Commissioners of Customs and Excise v Midland Bank, to look further in order to see whether the [2000] ECR I-4177, I-4179, at point 29, where he considers that the words 'direct' and 'immediate' refer to VAT which it is sought to deduct was borne a 'particularly close link' between two transactions, in which no third transaction has taken place 'breaking the by a supply forming a cost component of causal chain'. some other taxable transaction.

40. It would in that event be necessary to consider that the transferor's input supplies 42. According to a broader approach, were acquired for the purposes of the where a taxable person pursues an eco- recipient's subsequent taxable outputs, an nomic activity in which he makes wholly approach favoured by Abbey National and taxable supplies, all the goods and services alluded to in the High Court's first ques- supplied to him for the purposes of that tion. The United Kingdom Government has activity are cost components of his outputs objected that this would involve an unac- and all the VAT borne by them should be ceptable reversal of the order of succession deductible. The fact that, from a strict laid down in Article 5(8), making the bookkeeping point of view, inputs are not transferor the successor to the recipient. attributed to or even apportioned among That objection does not appear to me to be particular outputs is of no import here. justified. The approach in question merely Clearly not all goods and services con- postulates that the purpose for which the sumed by a taxable person will be incorpo- input is used may be that of the person rated directly into an identifiable output. deemed in these particular circumstances to Some will be of the nature of general

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overheads and, to the extent that those of the VAT payable or paid in the course of overheads are cost components of taxable all his economic activities'. That intention supplies, VAT levied on them may be would clearly not be achieved if he were deducted. 24 Many types of overhead may left with a non-deductible VAT bill on be absorbed by the business as a whole, winding up his business. In addition, it may simply influencing indirectly the range of be reasoned that from an economic point of profit margins sought. view the costs of winding up a business are costs of the business as a whole and thus cost components of the supplies which it makes, even if they are not specifically entered as such in the accounts.

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46. Thus, both approaches lead to the same transferred represent only a part of the conclusion: where, in the context of Arti- transferor's taxable business which itself is cle 5(8), there is a transfer of the totality of only a part of the whole business. the assets of a business engaged solely in making taxable supplies, the transferor may deduct VAT incurred on inputs received in connection with the transfer because those inputs are attributable to taxable outputs and the chain linking the 49. However, in the light of the conclusion inputs to the outputs is not broken by an which I have reached with regard to the intervening exempt transaction. transfer of a totality of assets, I think those apparent complexities may be seen to dissipate. To the extent that the VAT on services related to the transfer is deductible, it is because it is attributable to — because there is a direct and immediate link with — supplies made by the part of the business whose assets are transferred. Thus, if those 47. On that basis, it clearly follows from supplies are all taxable, it will be deductible Articles 17(5) and 19 that where the trans- in full, and there will be no need to look fer of the totality of assets relates to a any further. Apportionment will come into business engaged in making both taxable play if the supplies are partly taxable and and exempt supplies, any input VAT must partly exempt. be apportioned between them, so that only part of it will be deductible.

50. The only circumstances in which it would be necessary to look to other aspects of the taxable person's business in order to determine apportionment would be if it were considered that, contrary to my view, Transfer of part of a totality of assets the VAT in question could not be attributed to the taxable supplies of the part of the business transferred.

Where a Member State has made use of the option in Articles 5(8) and 6(5) of the Sixth VAT Directive, so that a transfer of a totality of assets or part thereof is treated as not being a supply of goods or services, VAT on supplies received in order to make that transfer is deductible by the transferor:

— in full where the assets are those of a business making only taxable supplies;

— in accordance with Articles 17(5) and 19 of the directive where the assets are those of a business making both taxable and exempt supplies.

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