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3. At issue in the present cases is the tax treatment of the application by a trader of a motor car for his private use where, although he initially acquired the car with- out being able to deduct input tax, he '[t]he application by a taxable person of subsequently deducted tax on the expendi- goods forming part of his business assets ture incurred in connection with improve- for his private use or that of his staff, or the disposal thereof free of charge or more generally their application for purposes other than those of his business, where 1 — Original language: English. 2 — Sixth Council Directive of 17 May 1977 on the harmonisa- the value added tax on the goods in tion of the laws of the Member States relating to turnover question or the component parts thereof tax — Common system of value added tax: uniform basis of assessment, OJ 1977 L 145, p. 1. was wholly or partly deductible...'.

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6. Article 6(2)(a) contains a similar rule: 8. Article 11(A)(1)(b) defines the taxable amount in respect of the supplies referred to in Article 5(6) and 5(7). That taxable amount is to be:

'The following shall be treated as supplies of services for consideration:

'... the purchase price of the goods or of similar goods or, in the absence of a purchase price, the cost price, determined (a) the use of goods forming part of the as [at] the time of supply'. assets of a business for the private use of the taxable person or of his staff or more generally for purposes other than those of his business where the value added tax on such goods is wholly or partly deductible...' 9. Under Article 20(1 )(b) the initial deduc- tion is to be adjusted where after the return is made some change occurs in the factors used to determine the amount to be deducted. 7. Article 5(7)(c) allows Member States to adopt a supplementary provision.

12. The main proceedings concern the years 1991 and 1992 and are thus governed 15. In that connection the question arose by the Umsatzsteuergesetz (Turnover Tax whether Article 5(6) allowed taxation Law) 1991. Paragraph 1(1)(2) thereof sub- where the trader in question, after the jected the private use of goods and services initial non-deductible acquisition, deducted (Eigenverbrauch) to tax. Paragraph tax on expenses incurred in connection 1(1)(2)(a) defined as one of the cases of with improvements to or the maintenance Eigenverbrauch the a p p l i c a t i o n or use of the goods transferred to private (Entnahme) of business goods for other use. At the centre of that debate was the than business purposes. meaning of the concept of 'component parts' in Article 5(6) of the Sixth Directive.

13. The applicable German law was thus in substance similar to Article 5(6) of the Directive, with one exception: Article 5(6) 16. On that issue the Federal Ministry of subjects the charge to tax to the condition Finance published on 13 May 1994 a that 'the value added tax on the goods in question or the component parts thereof was wholly or partly deductible' whilst the 5 — The German legislation has in the meantime been modified and now expressly subjects the taxation of the transfer by a trader of business goods to non-business purposes to the condition that the input tax on the goods in question or the component parts thereof was wholly or partly deductible: 4 — See my Opinion in Case De Jong v Staatssecretaris van see Paragraph 3(1b) of the Umsatzsteuergesetz in its Financiën, cited in note 3, at paragraph 5. amended version.

Case C-322/99 17. The Bundesfinanzhof held by contrast in a judgment of 30 March 1995 8that expenditure on the maintenance or the use of goods which gave rise to deduction 18. Mr Fischer operated a business dealing cannot affect the taxation of the applica- in second-hand (vintage) cars. In 1989 he tion for private use of the goods them- purchased for his business an 'RR-Bentley' selves. That was because expenditure on at a price of DEM 28 000 from a private the maintenance or the use of goods did not vendor and thus without the possibility of in general lead to the acquisition or the deducting input tax. In 1990 he had creation of 'component parts' of goods extensive repairs to the bodywork and within the meaning of Article 5(6) of the respraying work carried out for which he paid DEM 10 800 plus DEM 1 512 VAT. He applied to deduct the VAT included in 6 — BStBl. 1994 I, p. 298. 7 — A recent notice from the Federal Ministry of Finance of 8 June 1999 no longer contains that 'simplification' rule: BStBl. 1999 I, p. 581. 9 — Case 50/88 Kuhne v Finanzamt München III [1989] ECR 8 — BFHE 177, 541. 1925.

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22. The Bundesfinanzhof referred the fol- lowing questions for a preliminary ruling:

21. In its appeal to the Bundesfinanzhof the Finanzamt pleads breach of Paragraph l(1)(2)(a) of the Umsatzsteuergesetz 1991 and, in doing so, relies on the following arguments. Under Article 5(6) of the Direc- tive a transfer to private use may be subject to tax where the value added tax on the goods in question or the component parts '(1) Do subsequent bodywork repairs and thereof was wholly or partly deductible. respraying work (on which VAT was Even if Mr Fischer did not claim deduction deducted) carried out on a car (on the of tax on the purchase of the car, he did so acquisition of which VAT was not in respect of the extensive bodywork deductible) mean, on application of repairs and respraying work carried out. the car for private use,

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(a) that the car must be viewed as as at the time of application for private goods on which VAT was partly use, or only the price of the repairs deductible under Article 5(6) of the carried out (on which VAT was Directive, or deducted)?

(b) that the subsequent expenditure is to be viewed as component parts, on which VAT was deductible, of (4) What is the relationship between Arti- the goods? cle 5(6) and Article 5(7)(c) of the Directive?

27. The action brought by Mr Branden- stein before the Finanzgericht (Finance Court) against that decision was successful. In the grounds of its judgment, the Finanz- 24. In its VAT notice for 1991, the Finan- gericht stated that the requirements for not zamt Düsseldorf-Mettmann deemed the being subject to tax under Article 5(6) of transfer of the car to private use to be the Sixth Directive were met because Mr taxable under Paragraph 1(1)(2)(a) of the Brandenstein's expenditure on the car Umsatzsteuergesetz 1991. It used as the whilst it formed part of his business assets basis of assessment the sum which the neither altered nor extended its potential plaintiff had declared as the value of the use, nor substantially increased its value. transfer to private use for the purposes of tax on profits (DEM 7 500) and levied VAT of DEM 1 050.

28. In its appeal on a point of law before the Bundesfinanzhof the Finanzamt essen- tially argues that Mr Brandenstein either added to the car 'component parts' within the original meaning of that expression 25. Mr Brandenstein lodged an official which — at least in part — were not complaint and argued that the transfer to consumed before the transfer to private private use of business goods, on the use, or independently (or additionally) purchase of which VAT was not deductible, acquired 'goods'. According to the Finan- should not be taxed. In support of his zamt 'component parts' are parts of a argument he referred to Court's judgment natural ensemble (natürliche Sacheinheit) in Kühne 10 and to the case-law of the or of a composite object which have lost Bundesfinanzhof. their self-standing distinctiveness {Selbstän-

3. How is the basis of assessment to be determined for an application of busi- Taxation under Article 5(6) ness assets for private use, where VAT is wholly or partly deductible, not on the goods disposed of, but on some of their components?

32. The first question in Case C-322/99 and the first and second questions in Case C-323/99 raise the issue whether a charge to tax under Article 5(6) arises where, 4. Is the deduction of input tax which a although VAT on the acquisition of the taxable person has claimed in respect car was not deductible, VAT was deducted of services or supplies for goods on the on work carried out on the car after the purchase of which VAT was not deduc- acquisition.

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33. In the event of an affirmative reply to Brandenstein deducted VAT on work car- the first question the referring court wishes ried out on the cars after their acquisition. to know by its second question in Case It will be recalled that they deducted VAT C-322/99 whether under Article 5(6) a on 'extensive bodywork repairs and charge to tax arises with regard to the respraying work' (Case C-322/99) and on goods in question and the component parts 'servicing, minor repairs, changing tyres, taken as a whole or only with regard to the installation of a catalytic converter and newly added component parts. replacement of a windscreen' (Case C-323/99).

34. The cars which Mr Fischer and Mr Brandenstein applied for their private use are 'tangible property' within the meaning 37. The answer to that question depends of Article 5(1) of the Directive and must as on the interpretation of the phrase in a consequence be classified as 'goods' for Article 5(6) 'where the value added tax on the purposes of Article 5. They may there- the goods in question or the component fore be the subject of a deemed supply parts thereof was wholly or partly deduc- under Article 5(6). tible'.

Was VAT on the 'goods' in question 'partly' deductible? 42. I agree however with the Commission and the German Government which both maintain that Article 5(6) of the Directive may not be interpreted in that way. 40. According to the Greek Government, in Case C-322/99 VAT on the 'goods in question' was 'partly' deductible within the meaning of Article 5(6) of the Direc- tive. It considers that the bodywork repairs and respraying work carried out on Mi- Fischer's 'RR-Bentley' were very extensive as can be seen from their considerable costs 43. First, the alternative 'partly deductible' (in comparison with the initial purchase seems designed to cover only situations in price). Those costs must therefore be which the goods in question were allocated viewed as having contributed to the total partly to the taxable person's business costs of the acquisition of the car in activities and partly to his private activities. question. A good example is provided by Arm- brecht 16 in which a trader chose at the moment of the acquisition of a property to assign only a part thereof to his business and to reserve the rest for his private use. Only in those cases is it entirely correct to 41. More generally, in the Greek Govern- speak of 'partly' deductible input tax. In ment's view, the concept of 'goods' in the present cases, by contrast, the initial Article 5(6) refers not only to their initial acquisition of the second-hand cars did not acquisition but also to all types of later expenditure which increases the value of those goods in the long run. Only expen- 14 — Cited in note 9. diture on the maintenance and use of goods 15 — Case C-193/91 Finanzamt München III v Mohsche [1993] which does not have any lasting influence ECR I-2615. 16 —Case C-291/92 Finanzamt Uelzen v Armbrecht [1995] on their value can be disregarded when ECU I-2775.

50. Even if the Finnish, Greek, German, 46. The German Government considers Netherlands, Swedish and Danish language essentially that expenditure of all kinds versions of Article 5(6) use 'time-neutral' (including expenditure on supplies of ser- expressions similar to the English 'compo- vices) which either maintains or increases nent parts', it follows from the French ('les the value of those goods gives rise to the éléments le composant'), Spanish ('los ele- applicability of the concept of 'component mentos que lo componen'), Italian ('gli parts'. elementi che lo compongono') and Portu-

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guese ('aos elementos que os compõem') — May supplies of services give rise to versions that the relevant moment for 'component parts'? establishing whether VAT on component parts was deductible is the moment of the application for private use and not the moment of the initial acquisition. The wording of Article 5(6) supports therefore the view that component parts may be added after the initial acquisition.

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as the relevant taxable amount the pur- 56. The French (les éléments le compo- chase price of the goods determined at the sant), Spanish (los elementos que lo com- time of the transfer to private use. Taxation ponen) and Italian (gli elementi che lo under Article 5(6) thus depends on the compongono) versions of the Directive use physical condition in which the goods in words which might perhaps be translated question leave the sphere of the undertak- into English as 'component elements'. The ing and become part of the taxable person's German (Bestandteile) and Dutch (bestand- private assets. The physical condition of the delen) versions use words closer to the goods at the time of the transfer depends in expression actually used in the English turn on whether work for the improvement version of the Directive, namely 'compo- or maintenance of the goods in question nent parts'. Despite that minor difference has been carried out on them. Since sup- between 'elements' and 'parts' the termi- plies of services (e.g. bodywork repairs) nology used in all language versions sug- might in economic terms have the same gests that 'component parts' within the positive long-term effects on the physical meaning of Article 5(6) must be physical condition and value of the goods in ques- and tangible objects which are integrated tion as supplies of goods (e.g. the supply of into the goods in question. I cannot see a new engine) the concept of component how services which do not entail supplies parts should be interpreted as including of goods (e.g. a car wash, or bodywork supplies of services which increase or repairs) can lead to 'elements' or 'parts' of maintain the value of the goods in question. goods within the meaning of Article 5(6) of In that connection the German Govern- the Directive. ment points also to the practical difficulties of distinguishing between supplies of ser- vices and supplies of goods. Work carried out on goods after their initial acquisition typically involves mixed supplies of services and goods (e.g. the replacement of a wind- screen).

constitute a supply of goods (Article 6(1) of nates the transaction in question must be the Directive). regarded as a supply of services.20 Servi- cing, for example, might require the supply of screws, oil-filters or spark plugs. Respraying work requires the supply of paint. In those cases where work on a car involves some ancillary and minor supplies of goods which are inextricably linked to the services in question that work must be 58. Furthermore, I do not share the fears viewed as a supply of services within the underlying the German Government's posi- meaning of Article 6(1) of the Directive tion, namely that the exclusion of supplies and cannot therefore be regarded as giving of services from the concept of component rise to the applicability of the concept of parts will lead to a significant amount of 'component parts'. untaxed private consumption and thus to tax avoidance. Either the services in ques- tion do not result in a lasting increase in the value of the goods (e.g. a car wash) and are therefore consumed within the business before the transfer to private use; or, where the services in question result in a lasting 60. Accordingly, supplies of services increase in the value of the goods in (including those which necessarily entail question (e.g. extensive bodywork repairs) ancillary and minor supplies of goods) the initial deduction can be adjusted under cannot give rise to 'component parts' Article 20(1)(b) of the Directive (see para- within the meaning of Article 5(6). graphs 84 to 93 below).

65. Nothing in the wording of Article 5{6) 62. The German Government considers indicates whether or not VAT deductions that all supplies which have not been on parts of relatively little value should consumed while the goods and component trigger taxation under that provision. parts formed part of the taxable person's business assets should in principle lead to taxation under Article 5(6). Consequently supplies of goods which may be classified as maintenance expenditure might also give rise to 'component parts', the only condi- tion being that those supplies may be used 66. I agree therefore with the Commission and consumed over a certain period of that the content of the concept of 'compo- time. nent parts' cannot be determined without having regard to the legal consequences of Article 5(6) of the Directive. It is thus necessary to address forthwith the issue raised by the second question in Case C-322/99, namely whether, in the event that Article 5(6) is applicable, a charge to tax arises with regard to the goods in 63. The Commission suggests by contrast, question and the component parts taken as as already stated, a narrower interpretation a whole or only with regard to the newly of the concept of 'component parts'. In its added component parts. view, only supplies which clearly increase the value of the goods in question give rise to component parts. Supplies of goods of a comparatively limited value should not be taken into account.

67. Article 5(6) states that the application of 'goods' for private use or 'their' applica- tion for other than business purposes must be treated as supplies made for considera- tion, 'where' the value added tax on the 64. If I understand those two divergent goods in question 'or' the component parts positions correctly, the German Govern- thereof was deductible. It follows from that ment would regard for example a new unambiguous wording that the application battery as a 'component part', whilst the of the goods in question and not just of

70. The clear wording and the legislative history suggest however that the legislature deliberately accepted that risk of double taxation and presumably did so for prac- tical reasons. For example in the German version of the initial Commission proposal the conditional sentence in question started with 'insoweit' (in so far). 22 Such a for- mulation could have been interpreted as 68. Both the Commission and the German setting up pro rata taxation. The final Government point out that on a literal version of the Directive uses however interpretation Article 5(6) may therefore 'wenn' (where). lead to double taxation. A second-hand car acquired without the possibility of deducting VAT from a private person carries VAT in it which normally was borne by a final consumer at the moment of an earlier acquisition. If VAT-deductible work on that car such as the installation of a new 71. We are thus faced with a dilemma in engine gives rise to a 'component part' respect of the interpretation of the concept within the meaning of Article 5(6), the of 'component parts' in Article 5(6). Either transfer of the car to private use triggers that concept is interpreted narrowly, which the taxation of the car as a whole. Conse- might conflict with the specific objective of quently, everything in the car except the Article 5(6), namely to prevent a taxable new engine will be taxed a second time. person from enjoying deduction advantages Those submitting observations are also to which he is not entitled by comparison aware that such double taxation is in with an ordinary consumer. Or that con- principle contrary to the general objective cept is interpreted broadly, which might of fiscal neutrality inherent in the system of value added tax. 21 22 — Commission Proposal for a Sixth Council Directive on the harmonisation of legislation of Member States concerning turnover taxes — Common system of value added tax: 2 1 — Case C-45/95 Commission v Italy [1997] ECU I-3605, uniform basis of assessment, submitted by the Commission paragraph 15 of the judgment. on 29 June 1973, OJ 1973 C 80, p. 1.

75. I agree therefore with the Commission that the deduction of VAT on the replace- ment of a windscreen wiper or an empty 73. I consider therefore for example that car battery should not lead to taxation of the replacement of tyres or the installation the car as a whole when it is transferred to of a car telephone or a car radio does not private use, whilst the installation of a create 'component parts' of the car in more powerful engine or of a catalytic question. Since those goods may easily be converter for the purpose of modernising separated from the car and be the object of the car might do so. That solution also has independent transactions they do not defi- the advantage of leading to a similar result nitely lose their physical and economic to that in Kühne. 23 distinctiveness. The transfer to private use of a car with a car radio or a car telephone must therefore be viewed for VAT purposes 23 — See paragraph 17 above.

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76. Although in some cases the above in situations such as those in the main solution will lead to double taxation con- proceedings there is a supply within the trary to the system of the Directive, that meaning of Article 5(6), the taxable consequence must be seen in the context of amount under Article 11(A)(1)(b) must be the wider problems arising under the determined by reference to the purchase Directive on the sale of second-hand goods, price of the car and the component parts notably where goods bought from a private taken together or only of the component individual are subsequently re-sold by a parts. trader in the course of his business. 24

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tax arises under Article 5(6), the taxable cation for private use of goods after the amount under Article 11(A)(1)(b) of the cessation of trading is governed exclusively Directive must be determined by reference by Article 5(6). It is therefore not necessary to the price of the goods and their compo- to give an interpretation of Article 5(7)(c). nent parts taken together.

Adjustments of deductions under Arti- Relationship between Articles 5(6) and cle 20 5(7)(c)

84. The fifth question in Case C-322/99 81. By the fourth question in Case and the fourth question in Case C-323/99 C-322/99 the referring court wishes to raise the novel issue whether the initial know what the relationship is between, on deduction for expenditure for work carried the one hand, Article 5(6), and, on the out on the cars in question may be adjusted other hand, Article 5(7)(c) which relates to under Article 20 of the Directive, if accord- the retention of goods by a taxable person ing to the Court's interpretation no charge when he ceases to carry out a taxable to tax arises under Article 5(6). economic activity.

86. Under Article 20(1)(b) the initial VAT-deductible work carried out on the deduction is to be adjusted where cars after their acquisition is not to be taxed under Article 5(6) (together with the transfer of the cars to private use), the application of the cars for private use must be regarded as a change of factors within the meaning of Article 20(1)(b) of the Directive and therefore lead to an adjust- ment of the initial deductions. 'after the return is made some change occurs in the factors used to determine the amount to be deducted, in particular where purchases are cancelled or price reductions are obtained; however, adjustments shall not be made in cases of transactions remaining totally or partially unpaid and of destruction, loss or theft of property duly 88. The German Government contends proved or confirmed, nor in the case of that as a matter of principle Article 20 applications for the purpose of making gifts cannot apply in cases of application of of small value and giving samples specified goods for private use. It argues that the in Article 5(6). However, Member States rules on deemed supplies in Articles 5 and may require adjustment in cases of transac- 6 of the Directive constitute a complete and tions remaining totally or partially unpaid exhaustive legal regime governing the pri- and of theft.' vate use of goods and services which precludes the parallel and/or cumulative application of the rules on adjustments of deductions under Article 20(1)(b).

which contained the different categories of ried out on those goods (including those application of goods to non-business pur- supplies of services and goods which did poses. The text of Article 20(1 )(b) as not lead to new component parts). In so far enacted, in that it excludes from the as the value created by VAT-deductible possibility of adjustment only two cate- work is still present in the value of the gories of application for private use, which goods in question at the moment of their are specifically mentioned in Article 5(6) of transfer to private use, unjustified deduc- the Directive, namely applications for pur- tions are thus compensated by taxation poses of making gifts of small value and under Article 5(6). giving samples, thereby allows the Member States to provide for adjustments in respect of other types of application. The issue is therefore not so much whether as a matter of principle adjustments of deductions under Article 20 are possible, but in which situations Article 5(6) leaves room for such adjustments.

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92. When adjusting those deductions one adjustment of deductions will in many has however to take into account that the cases not be necessary. value of the supplies of services and goods in issue may have been consumed within the business before the transfer to private use takes place. In so far as those tax- deductible supplies have been consumed 93. Accordingly, under Article 20(1)(b) of within the business, they can no longer be the Directive deductions on work carried transferred to private use and on the out on goods after their acquisition may be occasion of the transfer to private use there adjusted on the occasion of the transfer of is therefore no change of factors requiring those goods to private use if on the basis of an adjustment of deductions. Since the two the supplies in question the provisions of types of supplies concerned, namely sup- Article 5(6) relating to 'component parts' plies of services and supplies of goods are not applicable. Adjustments are how- which do not result in a lasting increase in ever possible only in so far as the value of the value of the goods concerned, will by the work in question has not been con- their very nature often be consumed before sumed within the business before the goods the transfer of the goods to private use, an were transferred to private use.

Conclusion

94. For the above reasons the questions referred should in my view be answered as follows:

(1) The provisions of Article 5(6) of the Sixth VAT Directive relating to 'component parts' apply only where 'goods' are supplied within the meaning or Article 5(1) (not services), where those goods become an integral part of

(5) Deductions on work carried out on goods after their acquisition may be adjusted under Article 20(1)(b) of the Directive on the occasion of the transfer of those goods to private use if on the basis of the supplies in question the provisions of Article 5(6) relating to 'component parts' are not applicable. Adjustments are however possible only in so far as the value of the work in question has not been consumed within the business before the goods were transferred to private use.

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