© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
F4. Cessation deemed supply
GENERAL​
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Purpose​
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- Avoid unjustified economic advantage and ensure deduction corresponds to use
"[31] It follows that the purpose of tax being levied on the retention of goods on which VAT became deductible pursuant to Article 18(c) of the VAT Directive is indeed similar to the purpose of the adjustment mechanism in so far as it is a matter, first, of avoiding giving an unjustified economic advantage to a taxable person compared to a final consumer who buys the goods and pays VAT on them, and, secondly, of ensuring a correspondence between deduction of input tax and charging of output tax (see, to that effect, by analogy, judgment of 14 September 2006 in Wollny, C‑72/05, EU:C:2006:573, paragraphs 35 and 36 and the case-law cited)." (Mateusiak C-229/15)
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- But not a mechanism to adjust original input deduction (based on value at time of cessation)
"[37] However, the taxation provided for in Article 18(c) of the VAT Directive is not based on the premiss that, where the taxable economic activity has ceased, the VAT that becomes wholly or partly deductible upon the acquisition of goods that are retained is higher or lower than that to which the taxable person was entitled, but rather on the occurrence of a new taxable transaction at the time the economic activity ceases.
[38] ... In the event of the cessation of the taxable economic activity, the taxable amount of the transaction is the value of the goods in question determined at the time of that cessation, which therefore takes into account the change in the value of those assets between their acquisition and the cessation (see, in particular, judgment of 8 May 2013 in Marinov, C‑142/12, EU:C:2013:292, paragraph 33)." (Mateusiak C-229/15)
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Time limit​
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- Eliminate inequality between private purchasers and persons acquiring goods in the course of business
"[39] In order to achieve the objective of Article 18(c) of the VAT Directive, which is to avoid a situation where the final consumption of goods on which the VAT became deductible is untaxed following the cessation of taxable economic activity, and to effectively eliminate any inequality for VAT purposes between consumers who acquire their goods from another taxable person and those who acquire their goods in the course of their business, taxation due under Article 18(c) of the VAT Directive must take place, as the Advocate General observed in point 34 of her Opinion, where goods on which VAT became deductible still have a residual value when the taxable economic activity ceases, regardless of the period of time between the date of purchase of those goods and the date on which the activity ceases." (Mateusiak C-229/15)
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- No time limit (even where capital goods are outside adjustment period)
"[32] However, the similarity of those objectives does not mean that the period laid down for the adjustment of a deduction by means of instalment payments over several years, pursuant to Articles 184 to 187 of the VAT Directive, may be treated as a period beyond which taxation pursuant to Article 18(c) of the directive is no longer possible.
...
[34] Article 18(c) of the VAT Directive provides for no other condition, in particular in respect of a period of time following acquisition during which there is to be a retention of goods after cessation of the activity in order for it to be subject to tax." (Mateusiak C-229/15)
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THE DEEMED SUPPLY​
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Domestic law​
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- Deemed supply of goods upon ceasing to be a taxable person subject to exceptions
"(1) Where a person ceases to be a taxable person, any goods then forming part of the assets of a business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless—
(a) the business is transferred as a going concern to another taxable person; or
(b) the business is carried on by another person who, under regulations made under section 46(4), is treated as a taxable person; or
(c) the VAT on the deemed supply would not be more than £1,000.
(2) This paragraph does not apply to any goods in the case of which the taxable person can show to the satisfaction of the Commissioners—
(a) that no credit for input tax has been allowed to him in respect of the supply of the goods or their importation into the United Kingdom;
(b) that the goods did not become his as part of the assets of a business, or part of a business, which was transferred to him as a going concern by another taxable person; and
(c) that he has not obtained relief in respect of the goods under section 4 of the Finance Act 1973.
(3) This paragraph does not apply where a person ceases to be a taxable person in consequence of having been certified under section 54." (VATA 1994, Sch 4, para 8)
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EU law​
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- Member states may treat cessation of economic activity as deemed supply of goods
"Member States may treat each of the following transactions as a supply of goods for consideration:
[...]
(c) with the exception of the cases referred to in Article 19, the retention of goods by a taxable person, or by his successors, when he ceases to carry out a taxable economic activity, where the VAT on such goods became wholly or partly deductible upon their acquisition or upon their application in accordance with point (a)." (Article 18)
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- Irrelevant why economic activity has ceased
"[37] The Court has made clear that Article 18(c) concerns the cessation of the taxable economic activity in general, without differentiating between the causes or the circumstances of that cessation, apart from the exception mentioned in the preceding paragraph, and that that provision consequently also covers the cessation of the taxable economic activity resulting from the removal of the taxable person from the VAT register (judgment of 8 May 2013, Marinov, C‑142/12, EU:C:2013:292, paragraphs 26 and 28)." ​(Wind Inovation 1 C-552/16)
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- Purpose is to avoid untaxed consumption of goods on which VAT was deducted
"[38] The Court has pointed out that the main objective of that Article 18(c) is to avoid a situation where the final consumption of goods on which the VAT became deductible is untaxed following the cessation of the taxable economic activity, regardless of the causes or circumstances of that cessation (judgment of 8 May 2013, Marinov, C‑142/12, EU:C:2013:292, paragraph 27)." ​(Wind Inovation 1 C-552/16)
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- Cannot have deemed supply where economic activity continues
"[46] Consequently, in a situation such as that at issue in the main proceedings, in which the company has been the subject of a court decision ordering the cessation of the activity for which it had been created, but in which it is not disputed that that company continued, whilst being placed under liquidation, to generate a turnover by carrying out economic transactions, that company must be considered to have the status of a taxable person and, consequently, it cannot be required, in order to be able to deduct the VAT calculated on its available assets, to pay the amount of VAT thus calculated." ​(Wind Inovation 1 C-552/16)
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Relationship to registration for VAT​
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- Query compatibility: ceasing to be a taxable person under UK law is not the same as ceasing economic activity
UK 'taxable person' depends on supplies in the UK, whereas EU 'economic activity' does not
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"(1) A person is a taxable person for the purposes of this Act while he is, or is required to be, registered under this Act." (VATA s.3(1))
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"(1) Subject to sub-paragraphs (3) to (7) below, a person who makes taxable supplies but is not registered under this Act becomes liable to be registered under this Schedule..." (VATA 1994, Sch 1, para 1)
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"(2) A taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply." (VATA 1994, s.4)
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VALUE OF DEEMED SUPPLY​
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- De-registration may cause cessation of economic activity
"[26] It is clear from the wording of Article 18(c) of the VAT Directive that it covers the cessation of the taxable economic activity in general, without differentiating between the causes or the circumstances of that cessation, and excluding only the cases referred to in Article 19 of that directive.
[27] The main objective of Article 18(c) of the VAT Directive is to avoid a situation where the final consumption of goods on which the VAT became deductible is untaxed following the cessation of the taxable economic activity, regardless of the causes or circumstances of that cessation.
[28] Accordingly, the answer to the first question is that, on a proper construction of Article 18(c) of the VAT Directive, that provision also covers the cessation of the taxable economic activity resulting from the removal of the taxable person from the VAT register." (Marinov C-142/12)
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Purchase price of similar goods or cost price
"Where a taxable person applies or disposes of goods forming part of his business assets, or where goods are retained by a taxable person, or by his successors, when his taxable economic activity ceases, as referred to in Articles 16 and 18, the taxable amount shall be the purchase price of the goods or of similar goods or, in the absence of a purchase price, the cost price, determined at the time when the application, disposal or retention takes place." (PVD Article 74)
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- Purchase price of such goods/similar goods at time of deemed supply
"[38] The taxation provided for in Article 18(c) of the VAT Directive takes into account changes to the value of business assets throughout the duration of their use for business purposes because, in accordance with Article 74 of the VAT Directive, for transactions such as those referred to in Article 18(c) of the VAT Directive, the taxable amount is to be the purchase price of the goods or of similar goods or, in the absence of a purchase price, the cost price, determined at the time when those transactions take place. In the event of the cessation of the taxable economic activity, the taxable amount of the transaction is the value of the goods in question determined at the time of that cessation, which therefore takes into account the change in the value of those assets between their acquisition and the cessation (see, in particular, judgment of 8 May 2013 in Marinov, C‑142/12, EU:C:2013:292, paragraph 33)." (Mateusiak C-229/15)
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- Refers to the residual value of the goods
"[32] It must be borne in mind that the Court has held that ‘the purchase price, determined at the time of allocation’, for the purposes of Article 74 of the VAT Directive, refers to the residual value of the goods at the time of allocation (see Joined Cases C‑322/99 and C‑323/99 Fischer and Brandenstein [2001] ECR I‑4049, paragraph 80). In respect of an application of a good also covered by that provision, the Court has held that the taxable amount was the value of the good in question, determined at the time of the application, and which corresponds to the market price for a similar good, account being taken of the costs of transforming that good (see, inter alia, Case C‑299/11 Gemeente Vlaardingen [2012] ECR, paragraph 30).
[33] It follows that, in the event of the cessation of the taxable economic activity, the taxable amount of the transaction is the value of the goods in question determined at the time of that cessation, which therefore takes into account the change in the value of those assets between their acquisition and the cessation." (Marinov C-142/12)
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- Not market value unless that corresponds to residual value
"[35] Accordingly, the answer to the second and fourth questions must be that Article 74 of the VAT Directive is to be interpreted as precluding a provision of national law under which, in the event of the cessation of the taxable economic activity, the taxable amount of the transaction is to be the open market value of the assets in existence at the time of that cessation, unless that value corresponds in practice to the residual value of those goods at that date and account is thus taken of the change in the value of those goods between the date of their acquisition and the date of the cessation of the taxable economic activity." (Marinov C-142/12)
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