ECJ says 'Lennartz' does not apply to assets put to taxable/non-taxable use
This case concerned the issue of whether the ‘Lennartz’ principle of upfront recovery could be applied to capital goods where there is mixed use. The AG’s Opinion in the case created some interest due to unofficial translations casting doubt on its application in such circumstances. However, the ECJ judgment has largely ignored the AG, finding that input tax incurred in making both taxable and non-taxable business supplies cannot be recovered in full. The Court made a clear distinction between this and Lennartz type cases where the mix is business and non-business (i.e., private use).
The Appellant promotes the interests of the agricultural sector in four Dutch provinces. Its members, who are traders in that sector, pay a membership subscription to it, the greater part of which goes towards activities designed to promote their general interests. During 2000, the Appellant acquired goods and services which it used both for its activities subject to VAT and for other unrelated activities. The Appellant applied for full deduction of the amounts of input VAT paid in respect of those goods and services, including those relating to its activities in promoting the general interests of its members.
By its first question, the national court sought to establish whether there was a right to deduct VAT under Articles 6(2) and 17(2) of the Sixth Directive, where the taxable person has used those goods and services both for the purposes of its business and, according to the wording of the question referred, ‘for purposes other than business purposes’. This refers to the services provided by the Appellant which promote the general interests of the members.
Article 6(2)(a) of the Sixth Directive provides that the following shall be treated as a supply of services for consideration:
“the use of goods forming part of the assets of a business for the private use of the taxable person or of his staff or more generally for the purposes other than those of his business where the value added tax on such goods is wholly or partly deductible.”
The Court referred to the Charles and Charles-Tijmens case, which looked at the mixed use of capital goods for business and private purposes, and which allows the taxable person to treat mixed-used capital assets as being immediately recoverable in full, with output tax on private use being accounted for under Article 6(2)(a). However, the Court distinguished this case from the Appellant’s circumstances, not only on the basis that the Tijmens case involved immovable property, but also that the asset in question was put to non-business/private use. In contrast, the Appellant in this case was putting goods and services to a non-taxable use, but as these activities constituted its main corporate purpose, they could not be considered as being for ‘purposes other than those of his business’. The Court also cited the Securenta ECJ case (C-437/06), which stated that non-economic activities such as those in the present case cannot give rise to a right to deduct.
It was not disputed that the Appellant’s activities of promoting the general interest of the group are not activities subject to VAT. The Court did agree with the AG’s Opinion to the extent that Article 6(2)(a) is not intended to result in such outside-the-scope-of-VAT transactions being considered as for ‘purposes other than’ those of the business. Such an interpretation would render Article 2(1) of the directive meaningless.
Consequently, the Court’s answer to the first question is that Articles 6(2)(a) and 17(2) must be interpreted as not being applicable to the use of goods and services allocated to the business for the purpose of transactions other than the taxable transactions of the taxable person, as the VAT due in respect of the acquisition of those goods and services, and relating to such transactions, is not deductible. In light of the answer given to the first question the court did not deem it necessary to answer the second.