On 3 May 2018, the Advocate General at the European Court of Justice (“ECJ”) delivered his opinion in two VAT cases.
The Ryanair case is about the right to deduct VAT on costs (“input VAT”) in case of an unsuccessful takeover bid. The Volkswagen case further delves into the deductibility of VAT on mixed costs in case a company makes VAT taxed as well as VAT exempt supplies. Both cases may have a significant VAT impact for companies in a great variety of sectors.
Ryanair is an airline company based in Ireland that attempted to acquire a 100% shareholding of Aer Lingus in 2006. Although the takeover was unsuccessful, Ryanair sought to recover the entire VAT on professional advisory fees incurred for the failed takeover. Ryanair argued that it intended to provide VAT taxed management services to Aer Lingus, had the takeover been successful. The questions arose whether VAT on the abort costs could be deducted.
The Advocate General opines that the input VAT should be fully deductible, even though the takeover bid failed and no involvement in the management of the target was possible. The fact that Ryanair already carried on commercial activities as an airline serves as an additional argument for deduction according to the Advocate General. In his opinion he also shares his views regarding the issue whether input VAT deduction should be limited in case of a small management fee, should the bid have been successful. He concludes that – based on previous ECJ case law – the amount of the fees is not relevant, provided it is not symbolic.
The view of the Advocate General supports deduction of VAT on abort costs – as well as acquisition costs – and addresses certain elements which in practice can be a topic of discussion with tax authorities. If the ECJ follows the view of the Advocate General, deduction of VAT on acquisition (and abort) costs should – overall – become less of a discussion point. It may also give rise to input VAT deduction in acquisition scenarios where under current practice such deduction would be considered not possible.
Volkswagen Financial Services (UK) Ltd (“Volkswagen”) supplies vehicles to customers by way of hire purchase. This is treated as two distinct supplies for UK VAT-purposes: (i) the VAT taxed transfer of the vehicle, and (ii) the VAT exempt provision of financing. The consideration paid by the customer for the VAT taxed transfer of the vehicle covers only the purchase price of the vehicle paid by Volkswagen. Other costs, provisions and profit margin are included in the consideration for the VAT exempt financing activity. The questions referred concern (inter alia) the deductibility of VAT on costs other than the purchase price of the vehicles. In particular the question is raised whether any VAT deduction on such costs can be claimed, if these costs are fully covered by the VAT exempt income and not by the VAT taxed income.
From the opinion it could be derived that a company with both VAT taxed and exempt activities may lose its deduction of VAT on mixed costs (such as costs of administration, audit and general advice), if these costs are solely included in the price of its VAT exempt activities.
If the principles outlined by the Advocate General would be confirmed by the ECJ, this could have a significant impact on how deduction of VAT should be approached. In particular, the question would arise whether the same principle would apply in the reverse situation: could VAT on mixed costs be fully deductible in situations where VAT exempt income does not include such cost component?
It should be noted that an opinion is an advice that Advocate Generals deliver to the ECJ in a specific case. It cannot be ruled out that the final judgements of the ECJ deviate from the opinions. We will of course provide an update when the ECJ rules in either case.