© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
F1. Withdrawal of business assets from business
Purpose
- Ensuring equal treatment with ordinary consumers
"[41] However, as the national court has pointed out, it follows from Article 5(6) of the Sixth Directive that the taxable person may withdraw the item from his business for his private use or that of his staff, or apply it for purposes other than those of his business. This withdrawal is treated as a supply for consideration where the item has given rise to entitlement to full or partial deduction of VAT.
[42] In this regard, it should be noted that the purpose of Article 5(6) of the Sixth Directive is, in particular, to ensure equal treatment as between a taxable person who withdraws goods from his business and an ordinary consumer who buys goods of the same type. In pursuit of that objective, Article 5(6) prevents a taxable person who has been able to deduct VAT on the purchase of goods used for his business from escaping payment of VAT when he transfers those goods from his business for private purposes and from thereby enjoying advantages to which he is not entitled by comparison with an ordinary consumer who buys goods and pays VAT on them (see Case C-20/91 De Jong [1992] ECR I-2847, paragraph 15, and Case C-48/97 Kuwait Petroleum [1999] ECR I-2323, paragraph 21, as well as, with regard to heading (a) of the first subparagraph of Article 6(2) of the Sixth Directive, which is based on the same principle, Case C-230/94 Enkler [1996] ECR I-4517, paragraph 33)." (Bakcsi C-415/98)
SCOPE
- No deemed supply here input was not recoverable on the initial purchase
"[44] It follows that, since the taxable person has not been authorised to deduct the residual VAT on capital goods purchased second-hand from a non-taxable person, the VAT on such goods must be considered not to be deductible for the purposes of Article 5(6) of the Sixth Directive and no tax may therefore be levied on that withdrawal under that provision (see, with regard to heading (a) of the first subparagraph of Article 6(2), Case 50/88 Kühne [1989] ECR 1925, paragraph 9). If the taxable person subsequently sells the goods, he will be carrying out that transaction in a private capacity, and not as a taxable person. That transaction will therefore be excluded from the system of VAT.
[45] Such an interpretation is compatible with the objective of equal treatment pursued by Article 5(6) of the Sixth Directive, since the taxable person does not enjoy any advantage to which he is not entitled in comparison with an ordinary consumer." (Bakcsi C-415/98)
- Test only looks at input recovery on initial purchase, not subsequent expenditure
"[53] On the one hand, the words the value added tax on the goods in question ... was ... deductible refer only to the tax on the initial purchase or manufacture of the goods and not to the tax on expenditure subsequently incurred in respect of the goods, which is referred to in particular by the words the value added tax ... on ... the component parts thereof was ... deductible." (Fischer C-322/99)
Components added
- Goods that retain physical and economic distinctiveness do not become components
"[64] As regards supplies of goods, it is necessary first of all, as the Advocate General observes in paragraph 72 of his Opinion, to distinguish according to whether the goods incorporated in the vehicle are or are not separable and independent by comparison with the vehicle. Thus, where such goods retain their physical and economic distinctiveness they must not be regarded as component parts of the vehicle.
[65] For VAT purposes, the allocation to the private assets of a taxable person of a vehicle in which such separable and independent goods have been incorporated must be regarded as constituting two independent taxable allocations. Consequently, neither of those allocations will be subject to VAT under Article 5(6) of the Sixth Directive unless the input VAT on what was allocated was deductible.
...
[70] ... Where a motor vehicle is allocated, the component parts are goods supplied which have definitively lost their physical and economic distinctiveness as a result of being incorporated in the vehicle and which have given rise to a lasting increase in the value of the goods which has not been entirely consumed at the time of the allocation." (Fischer C-322/99)
- Distinguish components that maintain value v. those which lead to lasting increase in value
"[66] Second, for reasons dictated by the principle of neutrality inherent in the scheme of the Sixth Directive, it is necessary to distinguish between supplies of goods which merely contribute to maintaining the value of the goods and which as a general rule have been consumed at the time of the allocation and those which lead to a lasting increase in the value of the goods and have not been completely consumed at the time of the allocation." (Fischer C-322/99)
- No deemed supply for components that simply maintain value
"[67] Where a taxable person allocates goods initially acquired from a non-taxable person without the possibility of deducting VAT, it would run counter to that principle of neutrality for that allocation to be subject to VAT where the supplies of goods after the acquisition, even though the VAT thereon was deductible, merely contributed to maintaining the goods without increasing their value and have therefore been consumed when the allocation is effected. In those circumstances, the taxable person would not enjoy any advantage to which he was not entitled by comparison with an ordinary consumer in allocating the goods without paying VAT." (Fischer C-322/99)
- Parts subsequently incorporated leading to lasting increase in value must be subject to deemed supply if input was recovered
"[57] For the purpose of attaining that objective, the components already present when the goods are initially acquired and the components incorporated after acquisition cannot be treated differently. In both cases, if a taxable person has deducted the VAT on the component parts of the goods, he must, when he allocates the goods for his private use, be prevented from enjoying an advantage to which he is not entitled by comparison with an ordinary consumer.
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[68] On the other hand, it is consistent with the objective pursued by Article 5(6) of the Sixth Directive for that type of allocation to be subject to VAT where the post-acquisition supplies of goods have led to a lasting increase in the value of the goods which has not been wholly consumed at the time of the allocation." (Fischer C-322/99)
- Deemed supply limited to components where no input recovered on main goods
"[76] Taxation of the goods in such a situation, where the input tax was not deductible on purchase, would lead to double taxation contrary to the principle of fiscal neutrality inherent in the common system of VAT, of which the Sixth Directive forms part (see, with regard to Article 5(6) of the Sixth Directive, Bakcsi, paragraph 46, and with regard to heading (a) of the first subparagraph of Article 6(2) of the Sixth Directive, Kühne, paragraph 10, and Case C-193/91 Mohsche [1993] ECR I-2615, paragraph 9). Taxation of the component parts as defined in paragraph 70 above ensures, moreover, that the taxable person does not enjoy any advantage to which he is not entitled by comparison with an ordinary consumer." (Fischer C-322/99)
- Taxable amount determined by reference to price at the time of allocation of goods incorporated
"[84] In view of the answer given in paragraph 78 above, the answer to Question 3 in Cases C-322/99 and C-323/99 must be that in the case of an allocation which is taxable under Article 5(6) of the Sixth Directive, in particular the allocation of goods (in this case a motor vehicle)
- which were acquired without any entitlement to deduct, and
- on which work giving entitlement to deduct has been carried out, resulting in the incorporation of component parts in the goods,
the taxable amount for the purposes of Article 11A(1)(b) of the Sixth Directive must be determined by reference to the price, at the time of the allocation, of the goods incorporated in the vehicle which constitute component parts of the goods allocated, within the meaning of Article 5(6) of that directive." (Fischer C-322/99)
- Does not apply to services
"[58] The question as to whether component parts may also refer to the supply of services as well as to the supply of goods was the subject of debate before the Court.
[59] In that regard, it is clear from Article 5(6) of the Sixth Directive that component parts refers to tangible, physical objects incorporated into the goods and cannot apply to the supply of services.
[60] Such an interpretation is supported by the position of that provision in the general scheme of the Sixth Directive. Since goods are defined in Article 5(1) of the Sixth Directive as tangible property, the component parts of those goods within the meaning of Article 5(6) must be of the same nature. Supply of services is defined in Article 6(1) of the Sixth Directive as any transaction which does not constitute a supply of goods within the meaning of Article 5 of that directive." (Fischer C-322/99)
Services
- Supply of services may include incidental goods
"[62] As the German Government has emphasised the difficulty in distinguishing between supplies of goods and supplies of services, particularly where work is carried out on a motor vehicle, it should be observed that there is a consistent body of case-law to the effect that in order to determine whether a given transaction is a supply of goods or a supply of services, it is necessary to identify its characteristic features (Case C-231/94 Faaborg-Gelting Linien [1996] ECR I-2395, paragraph 12). Where a supply of goods is only one component of a transaction in which supplies of services predominate, the transaction must be regarded as a supply of services (Faaborg-Gelting Linien, paragraph 14).
[63] It follows that supplies of services, including those which necessitate ancillary and minor supplies of goods, cannot constitute component parts within the meaning of Article 5(6) of the Sixth Directive." (Fischer C-322/99)