Building – Construction works – VAT liability – Appellant using part of building for private use – Appellant allocating entire costs of construction to business – Tax treatment under EC law putting appellant at financial advantage compared to non-taxable persons – Appellant challenging refusal of tax relief – National court referring to European Court of Justice – Whether relevant provisions infringing general principle of equal treatment – Preliminary ruling made
From 2002 to 2004, the appellant built a house with a swimming pool. From 2003, she used the house as a private residence, with the exception of an area that comprised around 11% of the building, which she let for business purposes. The appellant treated the whole of the building as forming part of her business and claimed the deduction of the full amount of input taxes charged on its construction.
By amended VAT assessment notices for 2002 and 2003, the Austrian tax office refused to take into account for deduction purposes the VAT paid on the construction of the swimming pool. With regard to the other building costs, it allowed a deduction of the input tax paid only to the extent of the use of the building for business purposes.
The appellant’s challenge to those notices was rejected by the tax authorities on the ground, in particular, that when Council Directive 77/388/EC (the Sixth Directive) came into force in Austria, the national legislation excluded the right to deduct input VAT that was payable in respect of the building costs of the parts of buildings to be used for private residential purposes and the national legislature had not waived the option, provided for in article 17(6) of the directive, to retain that exclusion.
The appellant appealed to the Administrative Court. She claimed that the treatment of an asset as forming, in its entirety, part of the assets of the business conferred a right to the full deduction of VAT and that the conditions set out in article 17(6), which allowed member states to retain an exclusion of the deductions that existed when the Sixth Directive came into force, had not been satisfied in the instant case.
The national court referred to the ECJ for a preliminary ruling as to whether: (i) the relevant provision was compatible with the general principle of equal treatment under EC law; and (ii) the resulting financial advantage, quantified at 5% of the net costs of construction of the part of the building used for private purposes, gave rise to the unequal treatment of taxable and non-taxable persons and between those who constructed a building for purely private purposes and those who constructed it, in part, for business purposes.
Held: The court made a preliminary ruling.
Article 17(2)(a) and 6(2)(a) of the Sixth Directive did not infringe the general principle of equal treatment by conferring on taxable persons, by means of a full and immediate right to deduct input tax on the construction of a mixed-use building and the subsequent staggered imposition of that tax on the private use of the building, a financial advantage compared to non-taxable persons and to taxable persons who used their property only as a private residence.
If a taxpayer chose to treat capital goods that were used for business and private purposes as business goods, the input VAT due on the acquisition of those goods was, in principle, immediately deductible in full. However, it followed from article 6(2)(a) that when the input tax paid on goods that formed part of the assets of a business was wholly or partly deductible, the use of those goods for the private purposes of the taxable person or his or her staff or for purposes other than those of his or her business was treated as a supply of services for consideration. That use, which therefore amounted toa “taxable transaction” within the meaning of art. 17(2) was, under article 11A(1)(c) thereof, taxed on the basis of the cost of providing the services. Consequently, where a taxpayer chose to treat an entire building as forming part of the assets of his or her business and used part of that building for private purposes, he or she was entitled to deduct the input VAT paid on all construction costs relating to that building and was subject to the corresponding obligation to pay VAT on the amount of expenditure incurred to effect such use.
Even if, after actual use for business purposes of the part of the building initially used for private purposes, a refund of the input tax due on the building costs was provided for, a financial charge would encumber the property during the period, which might sometimes be considerable, between the initial investment expenditure and the commencement of actual business use. The principle of the neutrality of VAT with regard to the taxation of the business required that the investment expenditure incurred for the needs and objectives of a business be regarded as economic activities giving rise to an immediate deduction of the input VAT due. The deduction system was meant to relieve the taxable person of the burden of the VAT payable or paid in the course of all his or her taxable economic activities.
Since those characteristics distinguished the position of taxable persons from that of non-taxable persons who did not exercise such economic activities, a possible variation in treatment resulted from the application of different rules to different situations, thus not giving rise to any infringement of the right to equal treatment. It followed that article 17(2)(a) and 6(2)(a) of the Sixth Directive did not infringe the general principle of equal treatment.
F Schubert and W.-D. Arnold, Rechtsanwälte, and C Prodinger, tax consultant, appeared for the appellant; T Krumenacker (acting as agent) appeared for the respondent; J Bauer (acting as agent) appeared for the Austrian government; K Gross and D Triantafyllou (acting as agents) appeared for the European Commission.
Eileen O’Grady, barrister