Transfer of totality of assets — Whether taxpayer entitled to deduct VAT on professional fees incurred in order to effect transfer — Commissioners finding only input VAT paid on costs recoverable — Regulation 5(1) of Value Added Tax (Special Provisions) Order 1995 — Articles 5(8) and 17 of Council Directive 77/388/EEC
Life assurance company Scottish Mutual Assurance plc was a 100% subsidiary of Abbey National plc, which represented it for VAT purposes. Scottish Mutual also carried on a business leasing premises for professional or commercial use. As part of that activity, it held a 125-year lease of Atholl House, Aberdeen, which it sublet to commercial tenants. Scottish Mutual had opted to charge VAT on the rent that it received for Atholl House, in accordance with UK legislation transposing Article 13C(a) of the Sixth Directive 77/388/EEC. It was therefore able to recover all input VAT paid on the costs connected with ownership of the building.
In December 1992 Scottish Mutual sold its rights under the 125-year lease, and its rights in the sublease, for £5.4m to a company not belonging to the same group. The commissioners considered that, for tax purposes, the sale constituted a transfer as a going concern within the meaning of regulation 5(1) of the Value Added Tax (Special Provisions) Order 1995 (SI 1995/1268), and that the other conditions in that regulation were satisfied. Consequently, they contended that no VAT was payable on the sale price.
In order to effect the transfer, Scottish Mutual incurred various professional fees for which it had to pay £4,365 VAT. The commissioners considered that only part of the input VAT paid on those costs could be recovered. Abbey National contended that it was entitled to recover all the VAT, and applied to the VAT and Duties Tribunal. The application was dismissed and Abbey National appealed to the High Court.
The matter was referred to the European Court by the High Court under Article 177 of the EC Treaty. The issue was whether, in circumstances where a member state had exercised the option in Article 5(8) of the Sixth Directive, so that the transfer of a totality of assets, or part thereof, was considered not to be a supply of goods, the transferor might deduct VAT on the costs of the services acquired in order to effect the transfer.
Held: Where a member state had made use of the option in Article 5(8) of the Sixth Directive, so that the transfer of a totality of assets, or part thereof, was regarded as not being a supply of goods, the costs incurred by the transferor for services acquired in order to effect that transfer formed part of that taxable person’s overheads, and, thus in principle, had a direct and immediate link to the whole of the economic activity. If, therefore, the transferor effected both a transaction in respect of which VAT was deductible and a transaction in respect of which it was not, it followed from Article 17(5) of the Sixth Directive that he could deduct only that proportion of the VAT that was attributable to the former transaction. However, if the various services acquired by the transferor in order to effect the transfer had a direct and immediate link to a clearly defined part of his economic activities, so that the costs of those services formed part of the overheads of that part of the business, and all the transactions relating to that part of the business were subject to VAT, he could deduct all the VAT charged on the costs of acquiring those services.
Written observations were submitted on behalf of: Abbey National plc, by Roderick Cordara QC and David Southern (instructed by SJ Berwin); the United Kingdom government, by R Magrill, acting as agent, and Kenneth Parker QC and Melanie Hall; the Netherlands government, by MA Fierstra, acting as agent; and the Commission of the European Communities, by Enrico Traversa and Francesca Riddy, acting as agents. Oral observations were submitted on behalf of: Abbey National; the United Kingdom government; and the Commission, represented by Richard Lyal, acting as agent.
Thomas Elliott, barrister