C-63/04 Centralan Property

JUDGMENT OF THE COURT (Third Chamber)

15 December 2005 *

In Case C-63/04,

REFERENCE for a preliminary ruling under Article 234 EC from the High Court of Justice of England and Wales, Chancery Division (United Kingdom), made by decision of 21 February 2003, received at the Court on 13 February 2004, in the proceedings

Centralan Property Ltd

v

Commissioners of Customs & Excise,

THE COURT (Third Chamber),

composed of A. Rosas, President of the Chamber, A. La Pergola, J.-P. Puissochet, U. Lõhmus and A. Ó Caoimh (Rapporteur), Judges,

* Language of the case: English.

Advocate General: J. Kokott, Registrar: L. Hewlett, Principal Administrator,

having regard to the written procedure and further to the hearing on 16 February 2005,

after considering the observations submitted on behalf of:

— Centralan Property Ltd, by R. Cordara QC, and P. Key, Barrister, instructed by Landwell, Solicitors,

— the United Kingdom Government, by K. Manji, acting as Agent, and N. Pleming QC,

— the Commission of the European Communities, by R. Lyal, acting as Agent,

after hearing the Opinion of the Advocate General at the sitting on 17 March 2005, gives the following

Judgment

Legal context and the dispute

1This reference for a preliminary ruling relates to the interpretation of Article 20(3) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ1977 L 145, p. 1), as amended by Council Directive 95/7/EC of 10 April 1995 (OJ 1995 L 102, p. 18) ('the Sixth Directive').

2The reference was made in the course of proceedings between Centralan Property Limited ('Centralan') and the Commissioners of Customs & Excise ('the Commissioners'), who are responsible for the collection of value added tax (VAT) in the United Kingdom, concerning the adjustment of deductions of input VAT.

Legal framework

Community legislation

3Under Article 2(1) of the Sixth Directive, 'the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such' is subject to VAT.

4Article 4(3) of the Sixth Directive provides as follows:

'Member States may also treat as a taxable person anyone who carries out, on an occasional basis, a transaction relating to the activities referred to in paragraph 2 and in particular one of the following:

(a) the supply before first occupation of buildings or parts of buildings and the land on which they stand; ...

Member States may apply criteria other than that of first occupation, such as the period elapsing between the date of completion of the building and the date of first supply ...'

5Article 5 of the Sixth Directive, entitled 'Supply of goods', provides:

'1. 'Supply of goods' shall mean the transfer of the right to dispose of tangible property as owner.

3. Member States may consider the following to be tangible property:

(a) certain interests in immovable property;

(b) rights in rem giving the holder thereof a right of user over immovable property;

(c) shares or interests equivalent to shares giving the holder thereof de jure or de facto rights of ownership or possession over immovable property or part thereof.

...'

6Article 13 of the Sixth Directive provides:

'A. Exemptions f or certain activities in the public interest

1. Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of such exemptions and of preventing any possible evasion, avoidance or abuse:

(i) children's or young people's education, school or university education, ... including the supply of services and of goods closely related thereto, provided by bodies governed by public law having such as their aim or by other organisations defined by the Member State concerned as having similar objects;

B. Other exemptions

Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse:

(b) the leasing or letting of immovable property ...

(g) the supply of buildings or parts thereof, and of the land on which they stand, other than as described in Article 4(3)(a);

C. Options

Member States may allow taxpayers a right of option for taxation in cases of:

(a) letting and leasing of immovable property;

(b) the transactions covered in B(d), (g) and (h) above.

Member States may restrict the scope of this right of option and shall fix the details of its use.'

7Article 17 of the Sixth Directive provides:

'1. The right to deduct shall arise at the time when the deductible tax becomes chargeable.

2. In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:

(a) value added tax due or paid within the territory of the country in respect of goods or services supplied or to be supplied to him by another taxable person;

5. As regards goods and services to be used by a taxable person both for transactions covered by paragraphs 2 and 3, in respect of which value added tax is deductible, and for transactions in respect of which value added tax is not deductible, only such proportion of the value added tax shall be deductible as is attributable to the former transactions.

This proportion shall be determined, in accordance with Article 19, for all the transactions carried out by the taxable person.

However, Member States may:

(c) authorise or compel the taxable person to make the deduction on the basis of the use of all or part of the goods and services;

8Article 19 of the Sixth Directive contains the detailed rules for the calculation of the deductible proportion referred to in Article 17(5) of the directive.

9Adjustments of deductions are governed by Article 20 of the Sixth Directive, which provides as follows:

2. In the case of capital goods, adjustment shall be spread over five years including that in which the goods were acquired or manufactured. The annual adjustment shall be made only in respect of one-fifth of the tax imposed on the goods. The adjustment shall be made on the basis of the variations in the deduction entitlement in subsequent years in relation to that for the year in which the goods were acquired or manufactured.

By way of derogation from the preceding subparagraph, Member States may base the adjustment on a period of five full years starting from the time at which the goods are first used.

In the case of immovable property acquired as capital goods, the adjustment period may be extended up to 20 years.

3. In the case of supply during the period of adjustment capital goods shall be regarded as if they had still been applied for business use by the taxable person until expiry of the period of adjustment. Such business activities are presumed to be fully taxed in cases where the delivery of the said goods is taxed; they are presumed to be fully exempt where the delivery is exempt. The adjustment shall be made only once for the whole period of adjustment still to be covered.

However, in the latter case, Member States may waive the requirement for adjustment in so far as the purchaser is a taxable person using the capital goods in question solely for transactions in respect of which value added tax is deductible.

...'

National legislation

Legislation in respect of VAT

10In the United Kingdom, the relevant provisions of the Sixth Directive were implemented by the Value Added Tax Act 1994 ('the VAT Act') and the Value Added Tax Regulations 1995 ('the VAT Regulations').

11Pursuant to regulation 101(1) of the VAT Regulations, deductible input tax is limited to 'that amount which is attributable to taxable supplies'.

12The part of regulation 114 of the VAT Regulations which is applicable in the main proceedings provides for adjustments over a period of 10 years in accordance with the method prescribed in regulation 115. In each of those years, called 'intervals', the owner of a capital item may make an adjustment in respect of one-tenth of the input tax, by reference to the rules laid down by the VAT Regulations.

13Regulation 115(3) of the VAT Regulations implements Article 20(3) of the Sixth Directive. According to the wording of that provision, it applies '[w]here the whole of the owner's interest in a capital item is supplied by him ... during an interval other than the last interval applicable to the capital item ...'.

14Under Item 1(a)(ii) of Group 1 in Schedule 9 to the VAT Act, the transfer of the freehold in new non-residential buildings is excluded from the definition of exempt supplies. According to the notes to that group, buildings are still deemed to be new if their construction was completed less than three years before the transfer.

15With effect from 30 November 1994, a new subparagraph 3A was inserted in paragraph 2 of Schedule 10 to the VAT Act, which provided that, in cases where a legal person opts for taxation of letting and leasing of immovable property under Article 13C(b) of the Sixth Directive, that option does not apply to transactions with a legal person connected to it within the meaning of the VAT Act, if either of those persons is not a 'fully taxable person'. That subparagraph was subsequently repealed with effect from 26 November 1996.

The law of immovable property

16It is apparent from the documents before the Court that under the law of England and Wales, a 'freehold' can be described, if it is not encumbered with other 'lesser' interests, as the right to occupy immovable property for an unlimited period. A 'lease' is a leasehold interest, which amounts to the right to occupy immovable property for a defined period of time. There is no limit to the length of a lease, and leases for 999 years are common. It is possible for the owner of a freehold to grant a lease for a period of 999 years in return for a substantial premium with no, or very low, subsequent rental payments.

17Once the owner of a freehold has granted a lease, he no longer owns an 'unencumbered freehold' but merely the 'freehold reversion', that is, a residual interest in the property which equates to the right to occupy the property once the lease has expired and to receive the rent, if any, throughout the term of the lease. If the rent under the lease is very low and the lease very long, the freehold reversion is of low value.

18The owner of an unencumbered freehold in a building can transfer his interest in the building by means of more than one transaction. First, he can transfer the right to occupy the property for a limited period, by granting a lease (in return for rent, a premium or a combination of the two). He can then, by transferring the freehold reversion, grant the right to occupy the property on the expiry of the lease, together with the right to receive any rent due under the lease.

The main proceedings and the question referred for a preliminary ruling

19Centralan is a wholly owned subsidiary of Centralan Holdings Ltd, which is itself wholly owned by the University of Central Lancashire Higher Education Corporation ('the University'). Centralan opted for taxation under Article 13C(b) of the Sixth Directive.

20Inhoco 546 Ltd ('Inhoco') is, like Centralan, a wholly owned subsidiary of Centralan Holdings Ltd. Unlike Centralan, Inhoco did not opt for taxation under the above provision.

21In 1994, the University, whose ability to deduct input VAT is limited, procured the construction of a building known as the Harrington Building ('the Harrington Building').

22On 14 September 1994, Centralan bought the Harrington Building from the University for the sum of GBP 6 500 000 plus VAT of GBP 1 370 500, and leased it back to the University for a term of 20 years at a yearly rent of GBP 300 000 plus VAT ('the 20-year lease'). That transaction enabled Centralan to deduct the VAT paid on the acquisition of the Harrington Building as input tax.

23From the perspective of the University, the transactions described in the preceding paragraph had the effect of replacing the non-deductible VAT which had been paid during the construction of the Harrington Building with the non-deductible VAT on the rents paid throughout the term of the 20-year lease. That replacement was not challenged by the Commissioners.

24In the course of the third interval after the acquisition of the Harrington Building, that is, after the amendment of the VAT Act referred to in paragraph 15 above, Centralan disposed of its whole interest in that building, so that regulation 115(3) of the VAT Regulations had to be applied.

25That disposal was effected by means of two successive transactions.

26The first transaction was the grant, on 22 November 1996, of a 999-year lease ('the 999-year lease'), subject to the 20-year lease in favour of the University, to Inhoco for a premium of GBP 6 370 000 and a nominal rent if demanded.

27By the second transaction, which took place on 25 November 1996, the freehold reversion in the Harrington Building was transferred to the University for a sum of GBP 1 000 ('the transfer of the freehold reversion').

28The grant of the 999-year lease was an exempt transaction because, although Centralan had opted for taxation of letting and leasing of immovable property, it was a legal person connected to Inhoco within the meaning of paragraph 2(3A) of Schedule 10 to the VAT Act.

29The transfer of the freehold reversion was a taxable transaction because, even though the University and Centralan are connected legal persons within the meaning of Schedule 10, the provisions of Item l (a)(ii) of Group 1 in Schedule 9 to the VAT Act excluded, in application of Articles 4(3) and 13B(g) of the Sixth Directive, the exemption for the supply of buildings completed less than three years before.

30In view of those transactions, a question arose as to how to apply the rules for the adjustment, under regulation 115(3) of the VAT Regulations, of the deduction of the input VAT paid on the acquisition of the Harrington Building by Centralan. The Commissioners claimed that the supply to be taken into account was the 999-year lease and that the transfer of the freehold reversion should be ignored as de minimis. In the alternative, they claimed that there should be an apportionment between the grant of the 999-year lease and the transfer of the freehold reversion, in proportion to the respective value of each of those transactions. By virtue of the former interpretation, Centralan would be liable to pay a sum of GBP 796 250 in respect of VAT, whereas, according to the second interpretation, the amount of VAT due would be GBP 796 090.

31Centralan challenged that point of view before the VAT and Duties Tribunal. It argued that it had disposed of its whole interest in the Harrington Building by the transfer of the freehold reversion alone, with the result that it was not liable under regulation 115 of the VAT Regulations for more than GBP 943.93 in respect of VAT.

32In rejecting Centralan's argument and the Commissioners' first interpretation, the VAT and Duties Tribunal held that the company had disposed of its whole interest in the Harrington Building by means of two supplies, namely, the grant of the 999-year lease and the transfer of the freehold reversion. According to the Tribunal, those two supplies were made in the course of the same interval and were moreover ineluctably linked and preordained in the sense that there was no likelihood that the transfer of the freehold reversion would not be effected once the 999-year lease had been granted.

33In those circumstances, the VAT and Duties Tribunal concluded that Article 20(3) of the Sixth Directive and therefore, necessarily, regulation 115(3) of the VAT Regulations must be construed as implicitly providing for an apportionment in a case where the whole ownership interest in a capital item is disposed of in two stages, entailing two supplies, one of which is exempt and the other taxable. On the basis of that reasoning, it decided that Centralan was liable for a sum of GBP 796 090 in respect of VAT.

34The Commissioners did not appeal the rejection of their argument that the transfer of the freehold reversion should be ignored as being de minimis.

35It is in those circumstances that, in order to ensure the correct application of regulation 115(3) of the VAT Regulations to the facts of the proceedings before it on Centralan's appeal, the High Court of Justice of England and Wales, Chancery Division, decided to stay the proceedings and to refer the following question to the Court:

'Where, during the period of adjustment provided for in Article 20(2) of the Sixth VAT Directive, a taxable person disposes of a building which is treated as a capital good, and the disposal of the building is effected by way of two supplies, being (i) the grant of a 999-year lease of the building (an exempt transaction under Article 13B(b) of the Directive) for a premium of GBP 6 million, followed three days later by (ii) the sale of the freehold reversion (a taxable transaction under Article 13B(g) and Article 4(3)(a) of the Directive) for a price of GBP 1 000 plus VAT and which either are or are not preordained in the sense that once the first had been carried out there was no chance that the second would not be,

is Article 20(3) of the Sixth VAT Directive to be interpreted so that:

(a) that capital good is regarded until the expiry of the period of adjustment as if it had been applied for business activities which are presumed to be fully taxed;

(b) the capital good is regarded until the expiry of the period of adjustment as if it

had been applied for business activities which are presumed to be fully exempt;

or

(c) that capital good is regarded until the expiry of the period of adjustment as if it had been applied for business activities which are presumed to be partly taxed and partly exempt in the proportion of the respective values of the taxed sale of the freehold reversion and the exempt grant of the 999-year lease?'

The question referred

36By its question, the national court asks, in essence, whether under Article 20(3) of the Sixth Directive, in circumstances such as those of the main proceedings, immovable capital goods must be regarded, until the expiry of the period of adjustment mentioned in that provision, as if they had been applied for business activities which are presumed to be fully taxable or fully exempt, or whether they are to be regarded as if they had been applied to business activities which are partly taxable and partly exempt in the proportion of the respective values of the two transactions to which those goods were subject, namely the grant of the 999-year lease and, three days later, the transfer of the freehold reversion.

37It is clear from the grounds of the order for reference that that question was raised in order to ascertain the method by which the deduction of the input VAT is to be adjusted in circumstances such as those of the main proceedings.

38In that regard, it should be noted that, as is clear from paragraph 32 above, the VAT and Duties Tribunal held that the two transactions mentioned in that paragraph were ineluctably linked and preordained. In its order for reference, the national court did not cast any doubt on that conclusion. As a result, the question referred by the national court must be examined solely in so far as it envisages a situation in which, as in the main proceedings, two inextricably linked transactions have been concluded.

39For the purposes of replying to the question thus stated, it must therefore be determined which of the transactions is to be taken into account for the application of Article 20(3) of the Sixth Directive or, if appropriate, to what extent each of those transactions is to be taken into account for that purpose.

Observations submitted to the Court

40In Centralans submission, the VAT treatment of capital goods during the remainder of the period of adjustment referred to in Article 20(2) of the Sixth Directive is presumed to be 'fully taxed' or 'fully exempt' depending on whether the supply which finally divests the taxable person of any interest in the capital goods concerned is taxable or exempt. Article 20(3) provides no basis for permitting several transactions to be taken into consideration in proportion to their respective value, since that provision is incompatible with the disposal in stages of the whole of an immovable property, or of all the rights in that property, particularly where the different disposal transactions concern different rights, transferred to different persons at different times. Furthermore, the wording of that provision does not permit an interpretation which takes into consideration the economic significance of the transaction in cases of successive disposals to different economic operators and disregards a transaction on the ground that the amount to which it relates is de minimis.

41Therefore, Centralan submits that only the transfer of the freehold reversion is relevant for the purposes of the adjustment.

42The United Kingdom maintains that the purpose of the rules governing the deduction of input VAT, of which Article 20(3) of the Sixth Directive forms part, is to determine the proportion of the VAT deductible as precisely as possible in order to reflect the use of the inputs effected in order to carry out taxable transactions. In its submission, that provision should be interpreted as meaning that, where the capital goods are supplied by means of two preordained transactions of which one is taxable and the other is exempt, the taxable person is presumed to use the capital goods for the rest of the period of adjustment partly for taxable activities and partly for exempt activities, in proportion to the relative values of the taxable supplies and exempt supplies by means of which the capital goods were sold.

43As a result, the United Kingdom submits, it is necessary to make an apportionment where the supply of goods within the meaning of Article 20(3) of the Sixth Directive is made by means of two preordained transactions, of which one is taxable and the other exempt. It observes that the interpretation suggested by Centralan would mean that the transfer of the Harrington Building would have to be regarded as being taxable in its entirety, although the transfer of the freehold reversion represents less than 0.02% of the value of that property.

44The Commission of the European Communities argues that Article 20(3) of the Sixth Directive envisages a single transaction which determines the tax position of the goods for the rest of the period of adjustment. It points out that, in accordance with Article 5(1) of that directive,'supply of goods' means the transfer of the right to dispose of tangible property as owner. According to the Commission, it appears that, under the applicable national law, the grant of a 999-year lease is not a transfer of ownership since the freehold reversion remains. Therefore, the grant of such a lease is not, by itself, a supply of capital goods for the purposes of the said Article 20(3).

45The Commission suggests therefore, like Centralan, that only the transfer of the freehold reversion must be taken into account for the purposes of the adjustment.

46In its written observations, the Commission also suggested that, if the Court should hold that the concept of the abuse of rights can be applied in a case such as that of the main proceedings, it is appropriate to add to the reply to the national court that, where a taxable person or a group of connected taxable persons engages in one or several transactions with no economic justification, but which produce an artificial situation the sole purpose of which is to create the conditions necessary for the recovery of input VAT, those transactions must not be taken into consideration.

47Nevertheless, at the hearing, the Commission recognised, as regards the possible application of the concept of the abuse of rights, that there had been no argument before the national courts on that point and that it had wrongly supposed that, having regard to the short period which elapsed between, first, the construction of the Harrington Building as well as its sale with the grant of the 20-year lease, and, second, the conclusion of the two transactions in question in the main proceedings, it was appropriate to think that all those elements together formed a prearranged scheme.

48At the same hearing, the United Kingdom adopted, in the alternative, the part of the Commission's written observations dealing with the concept of the abuse of rights.

The Court's reply

Preliminary observations

49In order to reply to the question referred, it is appropriate, as a preliminary point, to set Article 20(3) of the Sixth Directive in its context, that is, the system of deductions provided for in Articles 17 to 20 of the directive and the objective pursued by that system.

50According to settled case-law, the right to deduct provided for in Articles 17 to 20 of the Sixth Directive is an integral part of the VAT scheme and in principle may not be limited. It must be exercised immediately in respect of all the taxes charged on transactions relating to inputs (see, among others, Case C-62/93 BP Supergas [1995] ECR I-1883, paragraph 18, and Joined Cases C-110/98 to C-147/98 Gabalfrisa and Others [2000] ECR I-1577, paragraph 43).

51As the Court has repeatedly held, the deduction system is meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities. The common system of VAT consequently ensures complete neutrality of taxation of all economic activities, whatever their purpose or results, provided that they are themselves subject to VAT (see, among others, Case 268/83 Rompelman [1985] ECR 655, paragraph 19; Case 50/87 Commission v France [1988] ECR 4797, paragraph 15; Case C-37/95 Ghent Coal Terminal [1998] ECR I-1, paragraph 15; and Case C-465/03 Kretztechnik [2005] ECR I-4357, paragraph 34).

52It is clear from the wording of Article 17(2) of the Sixth Directive that, for a person concerned to be entitled to the right to deduct, first, he must be a 'taxable person' within the meaning of that directive and, second, the goods and services in question must be used for the purposes of his taxable transactions (see, to that effect, Case C-137/02 Faxworld [2004] ECR I-5547, paragraph 24).

53As regards goods and services which are used by a taxable person both for transactions giving rise to the right to deduct and for transactions not giving rise to that right, Article 17(5) of the Sixth Directive provides that only such proportion of the VAT shall be deductible as is attributable to the taxable transactions. That proportion is calculated according to the rules in Article 19 ofthat directive (see, to that effect, Case C-306/94 Régie Dauphinoise [1996] ECR I-3695, paragraphs 3 and 4, and Case C-136/99 Monte Dei Paschi Di Siena [2000] ECR I-6109, paragraph 24).

54It follows that the decisive criterion for the deduction of input VAT is the use of the goods and services concerned for taxable transactions. As the Court has already held, it is only to the extent that an item is used for the purposes of his taxable transactions that a taxable person may deduct from the VAT for which he is liable the VAT paid or payable in respect of that item (Case C-291/92 Armbrecht [1995] ECR I-2775, paragraph 27). It is thus clear from the case-law that the use to which the goods or services are put, or are intended to be put, determines the extent of the initial deduction to which the taxable person is entitled under Article 17 of the Sixth Directive and the extent of any adjustments in the course of the following periods, which must be made under the conditions laid down in Article 20 of that directive (see, to that effect, Case C-97/90 Lennartz [1991] ECR I-3795, paragraph 15, and Case C-396/98 Schloßstraße [2000] ECR I-4279, paragraph 37).

55As regards capital goods, Article 20 of the Sixth Directive lays down a special system of adjustment. In that regard, it should be noted that, in the context of Second Council Directive 67/228/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes — Structure and procedures for application of the common system of value added tax (OJ, English Special Edition 1967, p. 16), the Court held that the special system reserved for capital goods by that directive is explained and justified by the durable use of those goods and the attendant writing-off of their acquisition costs (see, to that effect, Case 51/76 Verbond van Nederlandse Ondernemingen [1977] ECR 113, paragraphs 12 and 13). Those considerations apply, mutatis mutandis, to the special system of adjustment of deductions relating to capital goods laid down in Article 20 of the Sixth Directive.

56Article 20(3) of the Sixth Directive governs the particular case of the supply of capital goods before the end of the period of adjustment. In that case, the annual adjustment is replaced by a single adjustment, based on the presumed use of the capital goods in question for the period still to run. Under that provision, the deductibility of the input VAT depends on whether the supply made is or is not subject to VAT.

57It follows from the foregoing that the rules laid down by the Sixth Directive in respect of adjustment are intended to enhance the precision of deductions so as to ensure the neutrality of VAT, with the result that transactions effected at an earlier stage continue to give rise to the right to deduct only to the extent that they are used to make supplies subject to VAT. By those rules, that directive is thus intended to establish a close and direct relationship between the right to deduct input VAT and the use of the goods and services concerned for taxable transactions.

58It is in the light of those considerations that the application of the rule of adjustment laid down in Article 20(3) of the Sixth Directive to a situation such as that in the main proceedings must be examined.

Application of Article 20(3) of the Sixth Directive

59In that regard, it must be determined as a preliminary point which transaction or transactions in question in the main proceedings can constitute a 'case of supply during the period of adjustment' within the meaning of Article 20(3) of the Sixth Directive.

60Under Article 5(1) of the Sixth Directive '"[s]upply of goods" [means] the transfer of the right to dispose of tangible property as owner'.

61In the question referred, the national court states that the disposal of the Harrington Building was effected by way of two supplies. However, Centralan maintains that Article 20(3) of the Sixth Directive is incompatible with the disposal in stages of the whole interest in immovable property, whereas the Commission submits that the wording of that provision envisages a single transaction. In that regard, the Commission, referring to the national law of property, argues that only the transfer of the freehold reversion seems to constitute the transfer of the right to dispose of the building as owner.

62However, without it being necessary to take a position on the validity of that last assertion, the Court not having competence to interpret the Member States' national laws, it must be stated that it is clear from the wording of Article 5(1) of the Sixth Directive that 'supply of goods' does not refer to the transfer of ownership in accordance with the procedures prescribed by the applicable national law but covers any transfer of tangible property by one party which empowers the other party actually to dispose of it as if he were the owner of the property (Case C-320/88 Shipping and Forwarding Enterprise Safe [1990] ECR I-285, paragraph 7, and Case C-185/01 Auto Lease Holland [2003] ECR I-1317, paragraph 32).

63In that context, it is for the national court to determine in each individual case, on the basis of the facts of the case, whether a given transaction in respect of property results in the transfer of the right to dispose of the property as owner within the meaning of Article 5(1) of the Sixth Directive (see, to that effect, Shipping and Forwarding Enterprise Safe, paragraph 13).

64Therefore, in the main proceedings, if the national court came to the conclusion that, in the specific circumstances of the case, each of the two closely connected transactions concluded by Centralan with Inhoco and the University respectively transferred to each of the latter the right to dispose of the Harrington Building as owner, each of those two transactions could be regarded as constituting a 'supply' within the meaning of Article 5(1) and consequently of Article 20(3) of the Sixth Directive.

65That interpretation cannot be affected by the Commission's argument that it is difficult to accept that each of two different persons, having different rights over a property, has the right to dispose of it as owner.

66The various manifestations of the concept of co-ownership in the Member States' legal systems are such as to indicate that it is possible that more than one person may have the right to dispose of property as owner. As a result, the interpretation set out in paragraph 64 above cannot be undermined by the fact that, immediately after the grant of the 999-year lease, Centralan still held the freehold reversion, nor by the fact that the grant of that lease encumbered the freehold interest, with the result that the freehold reversion alone and not the unencumbered freehold interest could be transferred.

67It follows from the foregoing that, in the main proceedings, both the first transaction, the grant of the 999-year lease, and the second transaction, the transfer of the freehold reversion, can constitute a 'supply' within the meaning of the Sixth Directive.

68If each of those transactions constitutes a supply, it must be determined which of them must be taken into account for the purposes of the adjustment required by Article 20(3) of the Sixth Directive or, if appropriate, the extent to which each of them must be taken into account for that purpose.

69In that regard, as the national court observed, account may be taken of, as the case may be:

— the transaction by which Centralan finally divested itself of its interest in the Harrington Building, that is, the transfer of the freehold reversion, a taxable transaction;

— the most economically significant transaction, that is, the grant of the 999-year lease, an exempt transaction; or

— those two transactions together.

70Under Article 20(3) of the Sixth Directive, in the case of supply during the period of adjustment capital goods are to be regarded as if they had still been applied for business use by the taxable person until the expiry of the period of adjustment. Such business activities are presumed to be fully taxed in cases where the supply of the goods concerned is taxed and they are presumed to be fully exempt where the supply of those goods is exempt.

71Relying on the fact that the wording of that provision seems to be limited to envisaging the situation in which 'the case of supply during the period of adjustment' consists of a single delivery, Centralan points out that it parted with the ownership of the Harrington Building completely only when it transferred the freehold reversion. It argues that it is on the date of that transfer alone that the deduction must be adjusted.

72However, it cannot be deduced from the wording of Article 20(3) of the Sixth Directive that, in a situation in which 'the case of supply' consists of two closely and inextricably linked transactions, each of which could in itself be regarded as a supply, only one of those transactions must be taken into consideration for the purposes of the adjustment required by that provision.

73As is clear from paragraphs 50 to 57 above, the system of deductions and adjustments provided for in Articles 17 to 20 of the Sixth Directive is intended to establish a close and direct relationship between the right to deduct input VAT and the use of the goods and services concerned for taxable transactions.

74In the specific circumstances of the main proceedings, taking into account each of the two supplies in question in proportion to their respective values is likely to attain that objective most satisfactorily. The adjustment of the deduction of input VAT will reflect the presumed taxable or exempt use of the Harrington Building all the more faithfully if an apportionment has been made on the basis of those values.

75By contrast, in circumstances such as those of the main proceedings, taking into account only the last effected transaction would not attain that objective, since that would amount to disregarding completely the fact that the capital goods in question were also supplied by way of an exempt transaction.

76As for taking into account the most economically significant transaction, that would not attain the objective pursued either, since it would amount to disregarding the fact that the goods were also supplied as part of a taxable transaction. The latter solution could give rise to even more incoherent results if the respective values of the two successive supplies were close to each other.

77That interpretation cannot be objected to because no apportionment mechanism is expressly provided for in Article 20(3) of the Sixth Directive, whereas other provisions of the directive, particularly Article 17(5), provide explicitly for such a mechanism. The adjustment rules relating to capital goods, of which Article 20(3) forms part, must be interpreted in the light of their objective, which is to ensure that deductions of input VAT closely reflect the use of durable inputs for the purposes of taxable transactions.

78Furthermore, such an interpretation finds support in the Court's case-law. Thus, the Court has held that a proportional approach is required even in circumstances where the wording of the relevant provision of the Sixth Directive does not provide for it expressly (Armbrecht, paragraphs 29 and 32, and Case C-230/94 Enkler [1996] ECR I-4517, paragraph 38).

79Centralan and the Commission however highlighted the practical difficulties which may result, in their submission, from taking into account two supplies for the purposes of the application of Article 20(3) of the Sixth Directive. In that regard, they cite particularly the example of two supplies which occur in the course of different intervals.

80Without it being necessary in this case to consider such an example, since it is hypothetical, it is sufficient to observe that while, admittedly, taking into account more than one supply occurring during the period of adjustment is liable to give rise to certain practical difficulties, it still does not lead to insurmountable difficulties capable of affecting the application of the VAT system. As the Advocate General suggested in points 56 and 58 of her Opinion, in such a case, one might consider, for example, continuing, in application of Article 20(2) of the Sixth Directive, the adjustment of the part of the initial deduction which relates to the interest remaining in the taxable person's ownership until, as the case may be, the transfer of that interest or the end of the period of adjustment.

81Finally, given that, in circumstances such as those of the main proceedings, in the event that the national court comes to the conclusion mentioned in paragraph 64 above, namely that each of the two transactions in question transferred the right to dispose of the capital goods in question as owner, the adjustment required by Article 20(3) of the Sixth Directive must be made taking into account the two supplies in question in proportion to their respective values, it is not appropriate to consider the possible application of the principle of abuse of rights in such circumstances.

82In those circumstances, the reply to the question referred for a preliminary ruling must be that Article 20(3) of the Sixth Directive is to be interpreted as meaning that, where a 999-year lease over capital goods is granted to a person against the payment of a substantial premium and the freehold reversion in that property is transferred three days later to another person at a much lower price, and where those two transactions

— are inextricably linked, and

— consist of a first transaction which is exempt and a second transaction which is taxable,

— and if those transactions, owing to the transfer of the right to dispose of those capital goods as owner, constitute supplies within the meaning of Article 5(1) of that directive, the goods in question are regarded, until the expiry of the period of adjustment, as having been used in business activities which are presumed to be partly taxable and partly exempt in proportion to the respective values of the two transactions.

Costs

83Since these proceedings are, for the parties to the main proceedings, a step in the action pending before the national court, the decision on costs is a matter for that court. Costs incurred in submitting observations to the Court, other than the costs of those parties, are not recoverable.

Operative part

On those grounds, the Court (Third Chamber) hereby rules:

Article 20(3) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, as amended by Council Directive 95/7/EC of 10 April 1995, is to be interpreted as meaning that, where a 999-year lease over capital goods is granted to a person against the payment of a substantial premium and the freehold reversion in that property is transferred three days later to another person at a much lower price, and where those two transactions

— are inextricably linked, and

— consist of a first transaction which is exempt and a second transaction which is taxable,

— and if those transactions, owing to the transfer of the right to dispose of those capital goods as owner, constitute supplies within the meaning of Article 5(1) of that directive,

the goods in question are regarded, until the expiry of the period of adjustment, as having been used in business activities which are presumed to be partly taxable and partly exempt in proportion to the respective values of the two transactions.

[Signatures]

OPINION OF ADVOCATE GENERAL KOKOTT delivered on 17 March 2005 1

I — Introduction

1The High Court of Justice of England and Wales, Chancery Division, seeks an interpretation by the Court of Justice of the provisions of Sixth Council Directive 77/388/ EEC 2 (hereinafter 'the Sixth Directive'). The main proceedings concern the assessment of a series of transactions involving the Harrington Building which the University of Central Lancashire Higher Education Corporation ('the University') had built.

2Since the University to a considerable extent provides services free of VAT it was able only to a very limited extent to deduct as input tax the VAT on the costs of erecting the building. The building was therefore transferred and let through several intermediaries between the University and private companies, including the appellant in the main proceedings whose sole shareholder, either directly or indirectly, is the University.

1 — Original language: German.

2 — Sixth Council Directive of 1" May 197" on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax. uniform basis of assessment (OJ 1977 L 145. p. 1)

Whether these transactions result in input tax after all being deducted is specifically dependent on an interpretation of Article 20 (3) of the Sixth Directive which governs the adjustment of input tax in the case of a supply of a capital good during the period of adjustment ('supply' for the purposes of Article 20(3) and Article 5(1) of the Sixth Directive).

3Consequent upon three currently pending sets of proceedings 3 the Commission has also proposed in these proceedings that the principle of abuse of rights should be applied.

3 — Cases C-255/02 (Halifax). C-419/02 (BUPA Hospitals) and C-223/03 (University of Huddersfield).

II — Legal framework

A — Relevant provisions of the Sixth Directive

4Under Article 2(1) 'the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such' is liable to VAT.

5Article 4(3) gives the Member States the possibility of treating as a taxable person anyone who carries out,

'on an occasional basis, a transaction relating to the activities referred to in paragraph 2 and in particular one of the following:

(a) the supply before first occupation of buildings or parts of buildings and the land on which they stand; Member States may determine the conditions of application of this criterion to transformations of buildings and the land on which they stand.

Member States may apply criteria other than that of first occupation, such as the period elapsing between the date of completion of the building and the date of first supply or the period elapsing between the date of first occupation and the date of subsequent supply, provided that these periods do not exceed five years and two years respectively.

6The concept of supply is defined in Article 5(1) as 'the transfer of the right to dispose of tangible property as owner'. In that connection, under Article 5(3) the Member States may also consider the following to be tangible property:

'(a) certain interests in immovable property;

(b) rights in rem giving the holder thereof a right of user over immovable property;

(c) shares or interests equivalent to shares giving the holder thereof de jure or de facto rights of ownership or possession over immovable property or part thereof'.

7Article 13 contains a comprehensive list of exemptions within the territory of the country:

— Under Article 13A(1)(i) university education and the supply of services and goods closely related thereto are exempt.

— Article 13B(b) exempts the leasing or letting of immovable property subject to certain exclusions to which the Member States may add others.

— Article 13B(g) exempts 'the supply of buildings or parts thereof, and of the land on which they stand, other than as described in Article 4(3)(a)'.

8Article 13C provides that Member States may allow taxpayers a right of option for taxation in certain cases, in particular the letting and leasing of immovable property.

9The right to deduct is governed by Article 17 extracts of which provide as follows:

'(1) The right to deduct shall arise at the time when the deductible tax becomes chargeable.

(2) In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:

(a) value added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person;

(5) As regards goods and services to be used by a taxable person both for transactions covered by paragraphs 2 and 3, in respect of which value added tax is deductible, and for transactions in respect of which value added tax is not deductible, only such proportion of the value added tax shall be deductible as is attributable to the former transactions.

This proportion shall be determined, in accordance with Article 19, for all the transactions carried out by the taxable person.

10Central to the present case are the provisions in Article 20 concerning the adjustment of deductions in respect of input tax in the case of capital goods:

'2. In the case of capital goods, adjustment shall be spread over five years including that in which the goods were acquired or manufactured. The annual adjustment shall be made only in respect of one fifth of the tax imposed on the goods. The adjustment shall be made on the basis of the variations in the deduction entitlement in subsequent years in relation to that for the year in which the goods were acquired or manufactured.

By way of derogation from the preceding subparagraph, Member States may base the adjustment on a period of five full years starting from the time at which the goods are first used.

In the case of immovable property acquired as capital goods the adjustment period may be extended up to 20 years.

3. In the case of supply during the period of adjustment capital goods shall be regarded as if they had still been applied for business use by the taxable person until expiry of the period of adjustment. Such business activities are presumed to be fully taxed in cases where the delivery of the said goods is taxed; they are presumed to be fully exempt where the delivery is exempt. The adjustment shall be made only once for the whole period of adjustment still to be covered.

B — National law

11The relevant national provisions are to be found in the VAT Act 1994 and the VAT Regulations 1995 SI 1995/2518. Part XV of

4 — The possibility of extending the adjustment period in the case of buildings to 20 years was introduced only by Council Directive 95/7/EC of 10 April 1995 amending Directive 77/388/EEC and introducing new simplification measures with regard to value added tax — scope of certain exemptions and practical arrangements for implementing them (OJ 1995 L 102, p 18). Previously provision was made in the Sixth Directive for only 10 years.

the latter instrument (Regulations 99 to 111) makes provision for input tax and partial exemption, whilst Part XVI (Regulations 112 to 116) makes provision for adjustment of the deduction of input tax. On property such as that in the main proceedings Regulation 114 provides for adjustments over a 10 year period. The details of the adjustment are laid down in Regulation 115 in accordance with the provisions of Article 20 of the Sixth Directive.

III — Facts, question referred and proceedings

12The University arranged for the construction of the Harrington Building. That property subsequently formed the subject-matter of various transactions between the University and private companies connected with it. The University's shareholdings are organised as follows: the University is the sole shareholder of Centralan Holding Ltd. For its part that company has two subsidiary companies, Centralan Properties Ltd (Centralan) which is the appellant in the main proceedings and Inhoco 546 Ltd (Inhoco).

13On 14 September 1994 the University sold the Harrington Building to Centralan for GBP 6.5m and VAT of GBP 1 370 500. For the University the disposal was a taxable transaction in accordance with Article 4(3) of the Sixth Directive which was not exempt under Article 13B(g) of the Sixth Directive. Centralan leased the building back to the University ('the Lease') for a term of 20 years 5 at an annual rent of GBP 300 000 plus VAT.

14Subsequently, Centralan disposed of the building by two preordained and connected transactions. First, on 22 November 1996 it granted a 999 year lease to Inhoco at a premium of GBP 6.37m and a nominal rent, if demanded. This second lease was granted subject to the 20-year lease in favour of the University, which remained unaffected. Accordingly, Inhoco acquired the right to payments of rent and to use of the building from year 21 to year 999. That is why the transaction is also known as a reversionary lease. Although Centralan had opted for taxation of the letting of the building, the supply constituted by the 999 year lease was an exempt supply because Centralan and Inhoco were connected persons within Paragraph 2(3A) Schedule 10 VAT Act 1994. 6

15Three days later, on 25 November 1996, Centralan transferred to the University the freehold reversion in respect of the building

5 — In that connection Centralan appears to have made use of its option under Article 13(C) of the Sixth Directive with the result that, by way of exception from Article 13 B(b) of the Sixth Directive, it was not tax-exempt.

6 — This provision was in force only between 30 November 1994 and 26 November 1996.

for GBP 1 000 and VAT. In respect of this transaction tax exemption in favour of connected undertakings was not applicable. Rather it was a taxable supply of a new building within the meaning of Article 4(3) of the Sixth Directive; under United Kingdom legislation a building is deemed still to be new if it is not more than three years old.

16Following disposal of the building differences of opinion arose between Centralan and the Commissioners of Customs and Excise ('Customs') concerning the adjustment of the deduction in respect of input tax. Customs took the view that the relevant supply was the 999 year lease and that the subsequent transfer of the reversionary title was to be regarded as de minimis. In the alternative they claimed that there should be an apportionment, based on the respective values of the supplies constituted by the two transactions. The first contention would give rise to a liability of Centralan to Customs of GBP 796 250, the second to a liability of GBP 796 090. Conversely, Centralan took the view that it had disposed of its whole interest in the Harrington Building by the transfer alone so that its liability did not exceed GBP 943.93.

17The VAT and Duties Tribunal upheld the second solution propounded by Customs. Centralan appealed against that decision to the High Court of Justice (Chancery Division) which, by order for reference received on 13 February 2004, referred to the Court of Justice the following question for a preliminary ruling:

'Where:

During the period of adjustment provided for in Article 20(2) of the Sixth VAT Directive a taxable person disposes of a building which is treated as a capital good; and

The disposal of the building is effected by way of two supplies, being (i) the grant of a 999 year lease of the building (an exempt transaction under article 13 B(b) of the Directive) for a premium of GBP 6 million, followed three days later by (ii) the sale of the freehold reversion (a taxable transaction under Article 13 B(g) and Article 4(3)(a) of the Directive) for a price of GBP 1 000 plus VAT and which either are or not pre ordained in the sense that once the first had been carried out there was no chance that the second would not be, is Article 20(3) of the Sixth VAT Directive to be interpreted so that:

(a) that capital good is regarded until the expiry of the period of adjustment as if it had been applied for business activities which are presumed to be fully taxed;

(b) the capital good is regarded until the expiry of the period of adjustment as if it had been applied for business activities which are presumed to be fully exempt; or

(c) that capital good is regarded until the expiry of the period of adjustment as ifit had been applied for business activities which are presumed to be partly taxed and partly exempt in the proportion of the respective values of the taxed sale of the freehold reversion and the exempt grant of the 999 year lease?'

18On 16 February 2005 the hearing took place before the Court. At the hearing Centralan requested the reopening of the written procedure should the Court wish to apply the principle of abuse of rights to the case. The referring court had made no submissions concerning that principle. It had been introduced into the proceedings only by the Commission in its written observations.

IV — Submissions of the parties

19In the proceedings Centralan, the United Kingdom Government and the Commission submitted observations.

20Centralan takes the view that, according to the clear wording of Article 20(3) of the Sixth Directive, the adjustment is dependent solely on the disposal of the reversionary title. It is only through that second procedure that the taxable person completely gives up his rights to the property. There is no justification for a view which, in the case of several successive disposals to various recipients, focuses on the economically predominant transaction and disregards one transaction as de minimis. Under the provision there is an alternative only as between taxable supply and tax exempt supply. Depending upon the type of the disposal input tax is either completely or not at all deductible. There was no basis in Article 20 (3) for an apportionment as between several supplies.

21The United Kingdom Government is of the view that an apportionment is required if the delivery of the good in the words of Article 20(3) of the Sixth Directive has been prearranged to be effected in two transactions of which one is taxable and the other tax exempt. The solution advocated by Centralan entails regarding the disposal as a whole as taxed although transfer of the freehold reversion accounts for less than 0.02% of the value of the item.

22In the Commission's view, the 999 year lease cannot be regarded as a supply within the meaning of Article 20(3) of the Sixth Directive. Under English law it is only the transfer of the freehold reversion that gives the acquirer the right to dispose of the property as an owner. It would give rise to practical difficulties to regard both transactions as a supply, in particular if the two transactions were not completed in the same adjustment period. However, the Commission considers that it must be examined whether there is a case of abuse of rights. 7 It is true that the Sixth Directive contains no provision concerning abuse of rights; it is however a principle of law which is recognised in many areas of Community law. Under that principle transactions are to be disregarded which have no business justification but are entered into by a group of taxpayers in order to create an artificial situation whose sole purpose is to create the conditions for the recovery of input tax. 8

V — Legal appraisal

23The question to be determined is the manner in which the deduction in respect of input tax is to be adjusted under Article 20 (3) of the Sixth Directive where a 999 year

7 — The Commission refers to the cases pending in relation to VAT (cited in footnote 3).

8 — The Commission relies chiefly on the definition of abuse of rights laid down in the judgment in Case C-110/99 Emsland-Stärke [2000] ECR 1-11569, paragraphs 52 and 53. However, that judgment relates to export refunds for agricultural products.

lease of a property is granted at a premium and title thereto is then transferred to another person in which connection the first transaction is VAT exempt and the second liable to VAT.

24The referring court submits to the Court three possible interpretations: (a) regard should be had solely to the last (taxable) transaction; (b) regard should be had solely to the first (tax exempt) transaction forming the economic focus of the transaction or (c) regard should be had to an apportionment as between both transactions in accordance with transaction value. Prior to an examination of which variant best complies with the requirements of the directive, it is appropriate to give a brief account of the rules concerning adjustment of the deduction for input tax in this connection.

A — Preliminary observation on the rules concerning adjustment of the deduction in respect of input tax

25The right to deduction of input tax is an 9 integral part of the VAT machinery. Deduction of input tax is intended to relieve the trader entirely of the VAT for which he is

9 — See judgments in Case C-62/93 BP Supergas [1995] ECR I-1883, paragraph 18, Joined Cases C-110/98 to C-147/98 Gabalfrisa and Others [2000] ECR I-1577, paragraph 43, and Case C-90/02 Bockemühl [2004] ECR I-3303, paragraph 38. liable or which he has paid in the course of his economic activities. Accordingly the common system of VAT ensures that, irrespective of their purpose and their result, all economic activities are charged to tax in a neutral way provided that those activities themselves are subject to VAT (principle of 10 the neutrality of VAT).

26Thus, the right to deduction presupposes that the person concerned is a taxable person within the meaning of the Sixth Directive and that the goods and services in question have been used for the purposes of his taxable transactions. 11 The right may not be restricted and can be exercised immediately in respect of all the taxes charged on 2 transactions relating to inputs. 1 Under Article 10(2) of the Sixth Directive the right to deduct arises as soon as the goods are 3 delivered or the services are performed. 1

27If an item is used only in part for taxable transactions then Article 17(5) of the Sixth

10 — Cf. inter alia judgments in Case 268/83 Rotnpelman ¡1985] ECR 655, paragraph 19, Case C-37/95 Ghent Coal Terminal (19981 ECR I-1, paragraph 15, and judgments m Gabalfnsa. cited in footnote 9, paragraph 44. and Bockenmuhl. cited in footnote 9, paragraph 39.

11 — Judgment in case C-137/02 Faxworld [2004] ECR I-5547, paragraph 24.

12 — Cf. judgments cited in footnote 9 as well as Judgments in Case C-97/90 Lennartz [1991] ECR I-3795, paragraph 2", and Case C-109/99 Metropol and Stadler [2002] ECR I-81, paragraph 42. and judgment in Case C-152/02 Terra-Baubedarf[2004] ECR I-5583, paragraph 35.

13 - Cf. judgment in Case C-100/98 Breitsohl [2000| ECR I-4321, paragraph 36. and the judgment in Tetra Baubedarf (cited in footnote 12, paragraph 311.

Directive, in conjunction with Article 19 thereof, becomes applicable. Under those provisions a deductible proportion is to be determined reflecting the proportion of the taxable supplies by the person concerned. In accordance with this apportionment inputs are attributed only proportionately to taxable transactions with the result that there is only a proportionate claim to deduction of input tax. Article 17(5) and Article 19 of the Sixth Directive thus bring about a correspondence between the extent of the economic activity 4 and the claim to deduction of input tax. 1

28The claim to deduction of input tax arises at a very early stage, that is to say on delivery of the goods or performance of the service constituting the input. Accordingly, an adjustment of the deduction may subsequently become essential under Article 20 of the Sixth Directive if the proportion of the undertaking's taxable supplies has changed from what it was at the time of receipt of the input.

29The requirement for an adjustment is particularly important in the case of capital goods because such goods remain part of the

14 — Cf. opinion of Advocate General Lenz of 15 February 1996 in Case C'306/94 Regie Dauplonoise [1996] ECR I-3695 (at point 37).

undertaking's assets over a long period. In respect of those goods, therefore, Article 20 (2) of the Sixth Directive provides that over a period of five years in every year of use a fresh determination is to be made as to whether the goods have been used for taxable purposes to the extent intended on their acquisition. In the case of immovable property the Member States may extend the adjustment period to 20 years. If there are discrepancies between the extent of use for taxable supplies in the year of acquisition and in the reference year the deduction in respect of input tax is to be adjusted. Depending on the case, the taxable person must therefore refund a proportion of input tax in respect of the reference year or may deduct a further part.

30Article 20(3) of the Sixth Directive makes provision for the special case where a capital good is transferred to a third party before expiry of the adjustment period, that is to say is removed from the undertaking's assets. In place of the annual adjustment there is then a one-off adjustment for the remaining period of adjustment. In such a case deduction in respect of input tax is dependent on whether the supply to the third party was taxable or not.

15 — Cf. on the corresponding provisions of the Second VAT

31In summary it may be stated that the rules on deduction of input tax seek to ensure that inputs remain free of tax in so far as they are used for the provision of taxable supplies. The entire value is taxed once only on the supply to the consumer. There should not be any additional taxation of inputs. However, tax losses must also be avoided by not allowing deduction for input tax on items which are not actually (entirely) used in order to effect taxable supplies.

32The provisions concerning the deductible proportion of input tax and the adjustment of such deduction seek as far as possible to ensure the neutrality of VAT (not to say to uphold the principle of a single charge to tax). In the words of the representative of Centralan, they increase the degree of accuracy of the deduction.

33On the other hand the rules on deduction of input tax must be clear and practicable. Thus, for example, regard is not had to the extent to which each individual good is used in connection with taxable supplies. Rather, the deductible proportion in respect of input tax is ascertained in relation to the taxable person's total supplies and then applied uniformly to the deduction of input Directive, judgment in Case 51/76 Verbond van Nederlandse Ondernemingen [1977] ECR 113 (paragraphs 12 and 13). tax in respect of all inputs. Also it is only in the case of capital goods that use of a good acquired with deduction of input tax is observed over a long period with a view to adjustment of the tax deducted.

B — Interpretation of Article 20(3) of the Sixth Directive

34In light of the objectives of the provisions concerning deduction and its adjustment, it must now be examined which of the interpretative variants is best able to meet these objectives. In that connection the starting point is the wording of the provision.

1. Concept of supply

35A precondition of the application of Article 20(3) of the Sixth Directive is that the capital good is supplied to a third party during the adjustment period. According to Centralan and the Commission, only disposal of the freehold reversion constitutes a supply. If that were true, interpretive variants (b) and (c) would be eliminated ab initio. For they are based on the assumption that the 999 year lease likewise constitutes a supply within the meaning of Article 20(3) of the Sixth Directive.

36Supply is defined in Article 5(1) as of the Sixth Directive as 'the transfer of the right to dispose of tangible property as owner'. By reference to English law, the Commission considers that only upon transfer of the freehold reversion is there a transfer of property rights.

37This view cannot be upheld. For, as the Court held in its judgment in Shipping and Forwarding Enterprise Safe, it follows from the wording of Article 5(1) of the Sixth Directive:

'that "supply of goods" does not refer to the transfer of ownership in accordance with the procedures prescribed by the applicable national law but covers any transfer of tangible property by one party which empowers the other party actually to dispose of it as if he were the owner of the 16 property'.

38Underlying that case was a device analogous to that in the present case. First, the right was transferred freely to dispose of the property in question (economic ownership). The (legal) ownership was then transferred separately form the economic

16 — Case C-320/88 Shipping and Forwarding Enterprise Safe [1990] ECU I-285. paragraphs 7 and 8. Sec also judgment in Case C-185/01 Auto Lease Holland [2003] ECR I-1317, paragraph 32.

ownership. The Court already considered the transfer of economic ownership to constitute a supply within the meaning of Article 5(1) of the Sixth Directive.

39Accordingly, the grant of a 999 year lease to Inhoco may already constitute a supply if Inhoco thereby receives authorisation to dispose of the property as an owner. In favour of that view is the fact that, in return for a one-off payment, Inhoco acquires rights of user for a very long period as well as the right to payments of rent under the 20 year lease with the University. The 999 year lease therefore approximates very closely to the transfer of economic ownership which was involved in Shipping and Forwarding Enterprise Safe. However, in the final analysis this is a matter to be established by the referring court which is competent to apply the law in the main proceedings.

40It might even be wondered whether only the 999 year lease constitutes a supply since the freehold reversion transfers such a bare title that it cannot be described as the transfer of genuine property rights. In that case only interpretative variant (b) would apply. Against that, however, is the fact that it is scarcely possible for a demarcation line to be drawn between cases in which the title is bare to the extent that there is no supply and cases in which there is a sufficiently substantive title. Is the demarcation line to be drawn at a 99 year lease, a 199 year lease or a 999 year lease? In order in this connection to avoid arbitrary demarcations, in a case such as this, transfer of the reversionary title should in principle still be regarded as a supply.

41None the less the Commission objects that property rights cannot be conferred on two persons. However, that objection cannot be upheld. For example, property can very well be transferred in co-ownership to a plurality of persons. Thus, owners of apartments as a rule acquire co-ownership shares in the common parts of the house, such as for example the stairs and passageways, as well as a notional share in the plot on which the house was built. Thus, if several persons can at the same time have property rights in relation to the same property, that must apply a fortiori, when the different legal rights are temporally demarcated. First, Inhoco can for 999 years claim rights under the lease. Only subsequently thereto do the rights arising out of the freehold reversion become current; these are essentially confined to the claim to surrender of the property on expiry of the lease.

42As an interim conclusion it may be stated that both the first transaction, the 999 year lease, and the second transaction, namely transfer of the freehold reversion, may constitute supplies within the meaning of Article 5(1) of the Sixth Directive. Since the same concept of supply may be presumed to underpin Article 20(3) of the Sixth Directive, both transactions may be significant in the context of the adjustment of input tax. Thus, none of the interpretative variants is precluded solely on the ground that one of the transactions does not meet the requirements of a supply for the purposes of that provision.

2. Relevant transaction in the case of several supplies

43It remains to clarify which supply is relevant for the adjustment of input tax if the item is supplied in several transactions to various persons. This could be: the last transaction by which the taxable person definitively cedes his interest in the item, the economically most significant transaction or all transactions together.

44The wording appears to suggest that there is only one supply. Under that wording business activities are presumed to be fully taxed 'where the delivery of the said goods is taxed; they are presumed to be fully exempt where the delivery is exempt'. 17

45However, it cannot be inferred solely from that wording that regard is to be had to only one transaction where delivery is effected in several transactions. The drafters of the directive had in contemplation the normal case where the item is delivered in one transaction. If by means of that formulation they had meant to say that, in the case of supplies comprising several transactions, only one transaction is relevant it would have been necessary to state which is the relevant transaction in such a case. It is rather the case that, in relation to situations in which delivery is effected by means of several transactions, Article 20(3) of the Sixth Directive contains a regulatory lacuna. That lacuna is to be filled by a supplementary interpretation of the provision in light of the regulatory context and its meaning and purpose.

46The rules on deduction of input tax seek to render inputs free of tax exactly in the proportion in which they are required in order to effect taxable transactions. That aim is best achieved by means of interpretative

17 — Emphasis added variant (c). Use partly for taxable and partly for exempt activities is most accurately reflected by apportionment as between the two transactions for the purposes of the adjustment of input tax.

47Neither of the other two interpretative variants achieve that objective to the same extent. It is true that in the case of variant (b) adequate regard is had to the emphasis on use. The fact that the taxable transfer of the freehold reversion is disregarded is not serious in light of the minimal value of that transaction in the present case. However, inherent in this method of proceeding is a lack of precision which in other situations, where there is not such a wide discrepancy between transaction values, can lead to incoherent results.

48Interpretative variant (a) completely fails to meet the objective of ensuring a connection between the deduction of input tax and the extent of use of the item concerned for taxable transactions. Although the taxable transfer of the freehold reversion constitutes only delivery of a negligible right in the building, variant (a) would result in a total deduction of input tax.

49The fact that in certain situations an apportionment is appropriate, even if not expressly provided for by the wording of the relevant provision of the Sixth Directive, is borne out by the following examples from the case-law.

50For example in the Armbrecht judgment the Court held that, where a taxable person sells property part of which he had chosen to reserve for his private use, he does not act with respect to the sale of that part as a taxable person within the meaning of Article 18 2(1) of the Sixth Directive. Thus, the Court interpreted Article 2(1) as meaning that a supply is taxable in so far as a taxable person carries out the transaction acting as a taxable person. For its part, the wording refers only to supplies made by a taxable person acting as such.

19

51In Enkler the Court was called on to reply to questions in connection with a motor caravan which was used partly for business purposes and partly for private purposes. In order to determine the taxable amount for the purposes of Article HA(1)(c) of the Sixth Directive it required an apportionment of the expenses of the motor caravan corresponding to the amount of 20 time of the non-business use.

18 — Case C-291/92 Armbrecht [1995] ECR I-2775, paragraph 24. 19 — Case C-230/94 Enkler [1996) ECR I-4517.

20 — Enkler (cited in footnote 19, paragraph 37).

52However, Centralan objects in the case of interpretative variant (c) that only on transfer of the freehold reversion is the building completely removed from the undertaking's assets. Only then is the adjustment to be carried out.

53All that may be inferred from Article 20 (3) of the Sixth Directive is that the adjustment is to be effected at the time of delivery. However, the provision contains no indication that, in the case of two transactions which occur in swift succession and are both to be categorised as supplies, only the last transaction is to be relevant for the purposes of the adjustment of input tax.

54Yet, if regard is had solely to the last supply transaction, that can lead to entirely arbitrary consequences, as elucidated by the United Kingdom Government on the basis of an example of a piece of agricultural land initially acquired with deduction of input tax, subsequently split into two parts and then sold on. In that connection it is assumed that the sale of one part attracts tax because that part has in the meantime been turned into building land whilst the sale of the other part which continues to be used for agricultural purposes is tax exempt. If one declines to take an overall view of all sales transactions and instead has regard only to the last transaction, the taxable person could influence adjustment of input tax at will by concluding one or other transaction first. To have regard only to the last supply transaction would thus afford to the taxable person possibilities of making arrangements which run counter to the objectives of the directive.

55That is also illustrated by the present case. Although by means of a tax-exempt supply (the 999 year lease) the building is to a very great extent separated from Centra lans assets, the deduction of input tax would be maintained in full if one were to focus solely on the second merely symbolic transfer of the freehold reversion.

56Finally, Centralan and the Commission point to the practical difficulties which are alleged to stem from interpretative variant (c). However, it cannot be established why apportionment of the taxable supply is not practicable on adjustment of the deduction of input tax. In ascertaining the deductible proportion under Article 17(5) and Article 19 of the Sixth Directive the calculations to be made are in any event more demanding. Moreover, the adjustment is to be made only in connection with capital goods disposed of during the adjustment period.

57According to Centralan and the Commission, specific problems would arise if the supplies in respect of which an apportionment was to be made were not all effected in the same adjustment periods. However, that is a hypothetical situation which does not arise in the present case.

58Irrespective of that fact, in such a case there are in fact no insuperable difficulties. Where in one year a capital good is partly removed from the business assets, under Article 20(3) of the Sixth Directive, the final adjustment of the input tax deduction in respect of that part must be effected for the remainder of the adjustment period. As regards the remaining part, the value of which is to be assessed on the basis of appropriate methods, the adjustment is spread over subsequent periods under Article 20(2) until that part is removed by a further supply within the meaning of paragraph 3 and in that regard final adjustment is effected.

59Thus, in the present situation, Article 20 (3) of the Sixth Directive must be interpreted as meaning that the capital good is regarded, until the expiry of the period of adjustment, as if it had been used for business activities which are partly taxed and partly exempt in the proportion of the respective values of the taxed sale of the freehold reversion and the tax exempt grant of the 999 year lease.

C — Abuse of rights

60In view of that solution it does not need to be examined whether and to what extent there is a prohibition on the abuse of rights in the area of VAT, the circumstances in which that prohibition applies and the legal consequences flowing therefrom. Nor is there any ground for reopening the written procedure.

61It is true that the transactions have an artificial effect and are aimed solely at affording the University the possibility of deducting the VAT paid on the construction of the Harrington Building, even though the University to a great extent provides tax exempt services. The interpretation of the Sixth Directive which I am here advocating, however, precludes these artificial transactions from giving rise to a tax exemption which would run counter to the objectives of the directive and would have to be remedied by recourse to unwritten principles such as the prohibition on the abuse of rights.

VI — Conclusion

62In light of the foregoing considerations, I propose that the Court should reply as follows to the question referred by the High Court of Justice (Chancery Division):

Where a building is disposed of by means of two preordained and independent supplies, that is to say by a tax exempt grant of a 999 year lease over the building and, three days later, by a taxable sale of the freehold reversion, Article 20(3) of Sixth Council Directive 77/388/EEC of 17 May 1977, on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, is to be interpreted as meaning that the capital good is regarded until the expiry of the period of adjustment as if it had been used for business activities which are partly taxed and partly exempt in the proportion of the respective values of the taxed sale of the freehold reversion and the tax exempt grant of the 999 year lease.