© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
M6. Cessation and input tax
INPUT VAT INCURRED BEFORE CESSATION​
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Initial right to deduction​
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- Initial right to deduct retained
"[43] The Court has also repeatedly held that the right of deduction, once it has arisen, is retained even if, subsequently, the intended economic activity was not carried out and, therefore, did not give rise to taxable transactions (judgments of 29 February 1996, INZO, C‑110/94, EU:C:1996:67, paragraph 20, and of 17 October 2018, Ryanair, C‑249/17, EU:C:2018:834, paragraph 25), or if, by reason of circumstances beyond its control, the taxable person was unable to use the goods or services which gave rise to the deduction in the context of taxable transactions (judgments of 15 January 1998, Ghent Coal Terminal, C‑37/95, EU:C:1998:1, paragraph 20; of 17 October 2018, Ryanair, C‑249/17, EU:C:2018:834, paragraph 25; and of 12 November 2020, ITH Comercial Timişoara, C‑734/19, EU:C:2020:919, paragraph 34 and the case-law cited)." (Vittamed C-293/21)
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Adjustment of VAT on change of intention​
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- Obligation to adjust where inputs that have not been fully consumed will never be used in course of taxable activities
"[54] In the light of the foregoing considerations, the answer to the first part of the question referred is that Articles 184 to 187 of the VAT Directive must be interpreted as meaning that a taxable person is under an obligation to adjust deductions of input VAT relating to the acquisition of goods or services intended to produce capital goods in the case where, as a result of the decision of the owner or sole shareholder of that taxable person to place it in liquidation and of the taxable person’s request to be removed, and it being removed, from the register of VAT payers, the capital goods produced have not been used – and will never be used – in the course of taxable economic activities, which is a matter for the referring court to ascertain." (Vittamed C-293/21)
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- Reason for cessation not relevant to obligation to adjust
"[57] Therefore, the fact that the placement of the taxable person in liquidation and, consequently, the abandonment of the planned taxable economic activity may be justified for reasons which may be characterised as circumstances beyond the taxable person’s control has no bearing on the latter’s obligation to adjust the deductions of VAT." (Vittamed C-293/21)
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- No adjustment where plan changes but still involves taxable supplies
"[47] Furthermore, the Court has stated that, where, by reason of circumstances beyond its control, the taxable person did not make use of a service or goods, such as immovable property, which gave rise to a deduction in the context of taxed transactions, it is not sufficient, in order to establish the existence of a ‘change’ for the purposes of Article 185 of the VAT Directive, for that property to remain empty after the termination of the lease to which it was subject, even where it has been established that the taxable person still intends to use it for a taxed activity and undertakes the necessary steps to that end, since that would be tantamount to restricting the right of deduction through the provisions applicable to adjustments (judgment of 28 February 2018, Imofloresmira – Investimentos Imobiliários, C‑672/16, EU:C:2018:134, paragraph 47; order of 18 May 2021, Skellefteå Industrihus, C‑248/20, EU:C:2021:394, paragraph 44)." (Vittamed C-293/21)
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"[46] In the light of all the foregoing considerations, the answer to parts (a) to (i) of the first question is that Articles 167, 168, 184 and 185 of the VAT Directive must be interpreted as meaning that the right to deduct input VAT on goods, in the present case immovable goods, and services acquired with a view to carrying out taxable transactions, is maintained where the investment projects initially planned have been abandoned owing to circumstances beyond the taxable person’s control, and there is no need to adjust that VAT if the taxable person still intends to use those goods for the purposes of a taxable transaction." (ITH Comercial C-734/19)
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- Intention to use for taxable sales in course of liquidation does not require adjustment
"[50] However, that might not be the case where the placing of the taxable person concerned in liquidation has nevertheless resulted in taxed transactions being carried out, for example the sale of assets for the purposes of discharging the taxable person’s debts, even though that does not form part of the economic activity initially planned by that taxable person.
[51] In that regard, the Court has held that, since the activity must be considered per se and without regard to its purpose or results, the mere fact that the initiation of insolvency proceedings in respect of a taxable person changes, in accordance with the rules laid down in national law, the purposes of that taxable person’s transactions, in the sense that those purposes no longer include the long-term operation of its business, but relate solely to its liquidation for the purposes of extinguishing debts followed by its dissolution, cannot, in itself, affect the economic nature of the transactions carried out in the course of that business (judgment of 3 June 2021, AdministraÅ£ia JudeÅ£eană a FinanÅ£elor Publice Suceava and Others, C‑182/20, EU:C:2021:442, paragraph 38).
[52] The Court has therefore ruled that Articles 184 to 186 of the VAT Directive must be interpreted as precluding national legislation or practice whereby the initiation of insolvency proceedings in respect of an economic operator, entailing the liquidation of its assets for the benefit of its creditors, automatically places an obligation on that operator to adjust the VAT deductions which it has made in respect of goods and services acquired before it was declared insolvent, where the initiation of those proceedings is not such as to prevent that operator’s economic activity, within the meaning of Article 9 of that directive, from being continued, in particular for the purposes of the liquidation of the undertaking concerned (judgment of 3 June 2021, AdministraÅ£ia JudeÅ£eană a FinanÅ£elor Publice Suceava and Others, C‑182/20, EU:C:2021:442, paragraph 45)." (Vittamed C-293/21)
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Deemed supply on cessation​
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- Member state may treat cessation as giving rise to deemed supply
"[36] When a company ceases to carry out a taxable economic activity, except in the cases of transfer to a company of a totality of assets or part thereof referred to in Article 19 of the VAT Directive, that directive provides expressly in Article 18(c) thereof that the retention of goods by a taxable person or by his successors may be treated as a supply of goods for consideration, where those goods have given rise to a deduction." ​(Wind Inovation 1 C-552/16)
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See F4. Cessation deemed supply.
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INPUT VAT INCURRED DURING CESSATION​
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Economic activity can continue after decision to terminate​
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- Economic activity may continue into liquidation
"[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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- Would breach fiscal neutrality/distort competition to treat supplies during liquidation as non-economic
"[39] Furthermore, as the European Commission has pointed out, that interpretation is also required in the light of the principle of fiscal neutrality, which precludes in particular two transactions which are identical or similar from the point of view of the consumer, which are therefore in competition with one another, from being treated differently with regard to VAT (see, to that effect, judgment of 4 March 2021, Frenetikexito, C‑581/19, EU:C:2021:167, paragraph 32).
[40] Even if the initiation of insolvency proceedings, such as those at issue in the main proceedings, normally entails the disappearance of the undertaking concerned, the fact remains that, as long as that undertaking continues its activities during the insolvency proceedings, it is in competition with other taxable persons carrying out services similar to its own, so that the services concerned must, in principle, be treated in the same way for VAT purposes." (BE C-182/20)
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- Purpose of liquidating assets for the benefit of creditors does not mean cessation
"[35] It is therefore necessary to examine whether economic activity may be deemed to have ceased as a result of the declaration of insolvency of the economic operator concerned, in so far as the consequence of that declaration of insolvency, in accordance with the rules laid down by national law, is that the transactions carried out after it may serve only to liquidate the assets of that operator for the benefit of its creditors.
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[38] Consequently, since the activity must be considered per se and without regard to its purpose or results, the mere fact that the initiation of insolvency proceedings in respect of a taxable person changes, in accordance with the rules laid down in national law, the purposes of that taxable person’s transactions, in the sense that those purposes no longer include the long-term operation of its business, but relate solely to its liquidation for the purposes of extinguishing debts followed by its dissolution, cannot, in itself, affect the economic nature of the transactions carried out in the course of that business." (BE C-182/20)
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- Sales in liquidation for purpose of paying debts does not affect economic nature of transactions
"[50] However, that might not be the case where the placing of the taxable person concerned in liquidation has nevertheless resulted in taxed transactions being carried out, for example the sale of assets for the purposes of discharging the taxable person’s debts, even though that does not form part of the economic activity initially planned by that taxable person.
[51] In that regard, the Court has held that, since the activity must be considered per se and without regard to its purpose or results, the mere fact that the initiation of insolvency proceedings in respect of a taxable person changes, in accordance with the rules laid down in national law, the purposes of that taxable person’s transactions, in the sense that those purposes no longer include the long-term operation of its business, but relate solely to its liquidation for the purposes of extinguishing debts followed by its dissolution, cannot, in itself, affect the economic nature of the transactions carried out in the course of that business (judgment of 3 June 2021, AdministraÅ£ia JudeÅ£eană a FinanÅ£elor Publice Suceava and Others, C‑182/20, EU:C:2021:442, paragraph 38).
[52] The Court has therefore ruled that Articles 184 to 186 of the VAT Directive must be interpreted as precluding national legislation or practice whereby the initiation of insolvency proceedings in respect of an economic operator, entailing the liquidation of its assets for the benefit of its creditors, automatically places an obligation on that operator to adjust the VAT deductions which it has made in respect of goods and services acquired before it was declared insolvent, where the initiation of those proceedings is not such as to prevent that operator’s economic activity, within the meaning of Article 9 of that directive, from being continued, in particular for the purposes of the liquidation of the undertaking concerned (judgment of 3 June 2021, AdministraÅ£ia JudeÅ£eană a FinanÅ£elor Publice Suceava and Others, C‑182/20, EU:C:2021:442, paragraph 45)." (Vittamed C-293/21)
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But see:
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"[39] In the present case, it is apparent from the file before the Court that the objective of the disposal of shares at issue in the main proceedings was to use the proceeds of that sale to settle the debts owed to Kaupthing Bank, the new proprietor of the Arovit group. As stated in the preceding paragraph of this judgment, such a sale cannot be deemed to be either a transaction for which the direct and exclusive reason is the taxable economic activity of C&D Foods, or a transaction constituting the direct, permanent and necessary extension of the taxable economic activity of that company. In those circumstances, that sale does not constitute a transaction consisting in obtaining income on a continuing basis from activities which go beyond the compass of the simple sale of shares and, accordingly, it does not come within the scope of VAT. It follows that the VAT relating to the disputed services is not deductible." (C&D Foods Acquisition C-502/17)
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Right to deduct
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- Input incurred in order to terminate operation: entitlement to deduct
"[23] With respect to the transfer of a totality of assets, the Court has held that, where the taxable person no longer effects transactions after using services provided for that purpose, the costs of those services must be regarded as part of the economic activity of his business as a whole before the transfer and that he must be recognised as being entitled to deduct. Any other interpretation would amount to drawing an arbitrary distinction between, on the one hand, expenditure incurred for the purposes of a business before it is actually operated and that incurred during its operation and, on the other hand, the expenditure incurred in order to terminate its operation (see Case C‑408/98 Abbey National [2001] ECR I‑1361, paragraph 35, and Case C‑137/02 Faxworld [2004] ECR I‑0000, paragraph 39).
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[31] The right to deduct VAT on account of the winding-up of the business must therefore be recognised in so far as its application does not give rise to fraud or abuse." (Fini C-32/03)
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- Input incurred in order to transfer operation: direct link to former economic activity
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"[34] It follows that the various services acquired by the transferor in order to effect the transfer of a totality of assets or part thereof do not have a direct and immediate link with one or more output transactions giving rise to the right to deduct.
[35] However, the costs of those services form part of the taxable person's overheads, and as such are cost components of the products of a business. Even in the case of a transfer of a totality of assets, where the taxable person no longer effects transactions after using those services, their costs must be regarded as part of the economic activity of the business as a whole before the transfer. Any other interpretation of Article 17 of the Sixth Directive would be contrary to the principle that the VAT system must be completely neutral as regards the tax burden on all the economic activities of a business provided that they are themselves subject to VAT, and would make the economic operator liable to pay VAT in the context of his economic activity without giving him the possibility of deducting it (see, to that effect, Gabalfrisa, paragraph 45). An arbitrary distinction would thus be drawn between expenditure incurred for the purposes of a business before it is actually operated and that incurred during its operation, on the one hand, and, on the other hand, the expenditure incurred in order to terminate its operation.
36 Thus in principle the various services used by the transferor for the purposes of the transfer of a totality of assets or part thereof have a direct and immediate link with the whole economic activity of that taxable person." (Abbey National plc C-408/98)
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- Not permissible to deny right to deduct on the basis that T can subsequently request deduction
"[43] Lastly, contrary to what the Romanian Government has, in essence, put forward, the possibility for the taxable person concerned, in a situation in which it was required, initially, to adjust the input VAT deductions made on account of it being declared insolvent, despite the continuation of its economic activity, of requesting, subsequently, that the sums concerned be repaid to it precisely because it continued, during the insolvency proceedings, its economic activity, is not such as to compensate for the limitation of its right to deduct resulting from that obligation to adjust imposed by national law." ​(BE C-182/20)
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INPUT TAX INCURRED AFTER CESSATION
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- Obligation incurred before cessation: input recoverable
"[45] Moreover, it is apparent from paragraphs 30, 31 and 35 of the judgment of 3 March 2005, Fini H (C‑32/03, EU:C:2005:128) that, as regards expenditure, such as rental expenditure, relating to a service used for a commercial activity carried out by a legal person which has ceased its activity and is in liquidation, the right to deduct the VAT payable on that expenditure must be recognised provided that that expenditure is directly and immediately linked to that activity, to the extent that the absence of any fraudulent or abusive intent has been established." (Wind Inovation 1 C-552/16)
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- Continuing obligations arising out of business directly linked to former business
"[24] Those same considerations dictate that transactions such as the payments which Fini H continued to have to make during the period over which its restaurant business was wound up must be regarded as forming part of the economic activity within the meaning of Article 4 of the Sixth Directive.
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[27] In the main case, Fini H’s obligation, owing to a non-termination clause in the lease, to continue paying business rent and charges on a property which it had leased for the purpose of carrying on a restaurant business until the normal expiry of the lease could, in principle, be regarded as being directly and immediately linked to the restaurant business.
[28] Since Fini H entered into the lease in order to have the premises necessary for carrying on its restaurant business and given that the premises were actually used for that business, it must be conceded that the partnership’s obligation to continue paying the rent and other charges after it had ceased that business was a direct consequence of the carrying on of that business.
[29] Accordingly, the duration of the obligation to pay the rent and the charges on those premises has no bearing on the existence of an economic activity within the meaning of Article 4(1) of the Sixth Directive, provided that that period of time is strictly necessary to complete the winding-up of the business." (Fini C-32/03)
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- No right to recover if input continues to be used but for private purposes
"[32] In that regard, the Court has already held that Community law cannot be relied on for abusive or fraudulent ends (see, inter alia, Case C‑367/96 Kefalas and Others [1998] ECR I‑2843, paragraph 20, and Case C‑373/97 Diamantis [2000] ECR I‑1705, paragraph 33). That would be the case, for example, if Fini H, whilst relying on the right to deduct VAT in respect of the payment of rent and charges relating to the period after the cessation of the restaurant business, continued to use the premises previously used as a restaurant as premises for purely private purposes." (Fini C-32/03)
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