The European Court of Justice has handed down its judgment in Abbey National plc v Commissioners of Customs and Excise. The High Court referred the case to the ECJ for a preliminary ruling on whether the taxpayer was entitled to recover as input tax VAT on professional costs incurred on the sale of an investment property which took effect as a transfer of part of a business as a going concern.
The effect of the transfer taking place as a going concern was that VAT was not payable on the price even though the taxpayer had opted to tax the property. Customs argued that the VAT on the taxpayers costs was not recoverable at all because it was not attributable to a taxable supply or alternatively that only a fraction could be recovered on the basis that it was an overhead of the business as a whole (which included the taxpayers retained exempt business) and was therefore attributable to both taxable and exempt supplies made by the taxpayer. In fact, Customs' alternative argument represents their current practice.
The ECJ ruled that VAT on costs incurred on the transfer of a business (in this case an investment property) could be recovered where the activities of the business or part of a business transferred were taxable. Therefore, (although in this case the matter will be referred back to the High Court for decision) as the taxpayer had opted to tax the investment property transferred the activities were fully taxable and VAT could be recovered in full.
The ECJ ruling will benefit taxpayers transferring properties as a going concern where they have opted to tax the properties transferred and where their activities as a whole have not been fully taxable. The other side to the coin however is that Customs may apply the ruling so as to ensure that taxpayers transferring properties as a going concern, where the option to tax has not been exercised, will no longer be able to treat the VAT on associated costs as overhead expenditure. This would mean that the VAT could not be recovered even in part. Customs will no doubt issue a response to the ECJ's ruling which should reveal how they intend to change their current practice.
Taxpayers who may have previously transferred a property as a going concern and who may be affected by the ECJ's ruling should consider their position. There may be an entitlement to make a claim in respect of VAT previously incurred but not recovered. This may need to be done expeditiously so as to fall within the 3 year time limit for making claims.
If you think that you might be affected by the decision and would like to discuss the matter please contact Mark Nichols(at mark.nichols@cms-cmck.com or on +44(0) 20 7367 2051) or Richard Croker (at richard.croker@cms-cmck.com or on +44(0) 20 7367 2149).
