© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
N4. Non-economic apportionment
MEANING OF NON-ECONOMIC
- Non-economic and non-business not the same thing (non-economic use may still be business use)
[32] Those conclusions are supported by the broad logic of the common system of VAT, under which a distinction is made between economic and non-economic activities according to criteria that are different from those distinguishing between business use and use for non-business purposes, in particular for private purposes." (Landkreis Potsdam-Mittelmark C-400/15)
"[37] The Court accordingly held, at paragraphs 30 and 31 of the judgment in Securenta, that the input VAT relating to expenditure incurred by a taxable person cannot give rise to a right to deduct in so far as it relates to activities which, in view of their non‑economic nature, do not come within the scope of the directive and that, where a taxable person simultaneously carries out economic activities, whether taxed or exempt, and non‑economic activities outside the scope of the directive, deduction of the input VAT relating to expenditure is allowed only to the extent to which that expenditure may be attributed as an output to the economic activity of the taxable person.
[38] It follows from these considerations that, as the Advocate General has noted in point 38 of his Opinion, Article 6(2)(a) of the directive is not intended to establish a rule that transactions outside the scope of the system of VAT may be considered to be carried out for ‘purposes other than’ those of the business within the meaning of that provision. Such an interpretation would have the effect of rendering Article 2(1) of the directive meaningless." (VNLTO C-515/07)
- Private use means use completely different from the business of the taxable person
"[39] It is also appropriate to state that, unlike Charles and Charles-Tijmens, which concerned immoveable property allocated to the assets of the business before being attributed, in part, to private use, by definition completely different from the business of the taxable person, the situation in the main proceedings in the present case relates to transactions other than VNLTO’s taxable transactions, consisting in safeguarding the general interests of its members, and not capable of being considered, in this case, to be non-business transactions, given that they constitute the main corporate purpose of that association." (VNLTO C-515/07)
- Personal use is private use
"[44] Such an interpretation is borne out by the legislative context of Article 44 of the VAT Directive. In the first place, recital 4 of Directive 2008/8 states, in particular, that, for supplies of services to taxable persons, the general rule with respect to the place of supply of services should be based on the place where the recipient is established, and that taxable persons who also have non-taxable activities should be treated as taxable for all services rendered to them. However, it is apparent from the last sentence of recital 4 that the provisions implementing those normal rules should not extend to supplies of services received by a taxable person for his own personal use or that of his staff.
[45] In the second place, according to recital 19 of the implementing regulation, ‘it should be clarified that when services supplied to a taxable person are intended for private use, including use by the customer’s staff, that taxable person cannot be deemed to be acting in his capacity as a taxable person’." (Wellcome Trust C-459/19)
- Use by body set up to promote interest of members in order to further interests of members is non-economic, business use
"[8] VNLTO promotes the interests of the agricultural sector in the provinces of Groningen, Friesland, Drenthe and Flevoland. Its members, who are traders in that sector, pay a membership subscription to it, the greater part of which goes towards activities designed to promote their general interests.
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[39] It is also appropriate to state that, unlike Charles and Charles-Tijmens, which concerned immoveable property allocated to the assets of the business before being attributed, in part, to private use, by definition completely different from the business of the taxable person, the situation in the main proceedings in the present case relates to transactions other than VNLTO’s taxable transactions, consisting in safeguarding the general interests of its members, and not capable of being considered, in this case, to be non-business transactions, given that they constitute the main corporate purpose of that association.
[40] Consequently, the answer to the first question is that Articles 6(2)(a) and 17(2) of the directive must be interpreted as not being applicable to the use of goods and services allocated to the business for the purpose of transactions other than the taxable transactions of the taxable person, as the VAT due in respect of the acquisition of those goods and services, and relating to such transactions, is not deductible." (VNLTO C-515/07)
- Use by local authority to construct and maintain roads not non-business use
"[16] By an appeal on a point of law before the Bundesfinanzhof (Federal Finance Court), the Landkreis claimed that the refusal to grant the VAT deduction is contrary to EU law. This is because, according to the Landkreis, while the Authorising Decision authorises the Federal Republic of Germany to apply a measure derogating from Article 17 of the Sixth Directive, it does not authorise it to exclude the right to deduct input VAT in cases — such as the present case — in which the extent of use of the goods concerned for non-economic activities, which fall outside the scope of VAT but which cannot be considered to be ‘for non-business purposes’, is greater than 90%. The Landkreis submits, therefore, that it is entitled to a proportional deduction of 2.65% of the input VAT.
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[40] In the light of all of the above considerations, the answer to the question referred is that Article 1 of the Authorising Decision must be interpreted as meaning that it does not apply to a situation in which the goods or services that an undertaking acquires are used, to an extent greater than 90%, for non-economic activities, which fall outside the scope of VAT." (Landkreis Potsdam-Mittelmark C-400/15)
- Charity buying and selling shares is a business, non-economic activity
"[43] In the present case, as is apparent from the information provided by the referring tribunal, it is common ground that the non-economic activity carried out by WTL, which consists of the purchase and sale of shares and other securities in the course of the management, as trustee, of the assets of the Wellcome Trust, is a business activity, not a private activity, and that it is exclusively for the purposes of that business activity that the investment management services are supplied to WTL by a person established outside the European Union." (Wellcome Trust C-459/19)
EFFECT OF NON-ECONOMIC USE
No input recovery for non-economic use
"[27] It is necessary to recall, at the outset, that the deduction system established by the directive is meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities. Thus, the common system of VAT seeks to ensure complete neutrality of taxation of all economic activities, whatever their purpose or results, provided that they are themselves subject, in principle, to VAT (see Case C‑408/98 Abbey National [2001] ECR I‑1361, paragraph 24 and the case‑law cited).
[28] Consequently, where goods or services acquired by a taxable person are used for purposes of transactions that are exempt or do not fall within the scope of VAT, no output tax can be collected or input tax deducted (see Case C‑184/04 Uudenkaupungin kaupunki [2006] ECR I‑3039, paragraph 24, and Case C‑72/05 Wollny [2006] ECR I‑8297, paragraph 20)." (VNLTO C-515/07)
- Cannot rely on deemed supply for non-business use to justify recovery where non-economic use is not private use (i.e. is still 'business use')
"[33] It is settled case-law that, where capital goods are used both for business and for private purposes, the taxpayer has the choice, for the purposes of VAT, of (i) allocating those goods wholly to the assets of his business, (ii) retaining them wholly within his private assets, thereby excluding them entirely from the system of VAT, or (iii) integrating them into his business only to the extent to which they are actually used for business purposes (judgment of 23 April 2009, Puffer, C‑460/07, EU:C:2009:254, paragraph 39 and the case-law cited).
[34] By contrast, there is no such freedom of choice when considering whether or not goods are used for economic activities. Where a business uses goods both for economic and non-economic activities, Article 17(2)(a) of the Sixth Directive merely provides a right to deduct input tax. The measures which the Member States are required to adopt in that regard must comply with the principle of fiscal neutrality on which the common system of VAT is based (judgement of 13 March 2008, Securenta, C‑437/06, EU:C:2008:166, paragraph 36)." (Landkreis Potsdam-Mittelmark C-400/15)
"[32] In its observations, the national court referred to, inter alia, Case C‑434/03 Charles and Charles‑Tijmens [2005] ECR I‑7037, particularly paragraphs 23 to 25 of that judgment, in which the Court referred to the case‑law on the system of VAT applicable to capital goods in mixed use, that is to say, in use for both business and private purposes. It follows that the taxable person has the choice, for VAT purposes, of (i) allocating goods wholly to the assets of his business, (ii) retaining them wholly within his private assets, thereby excluding them entirely from the system of VAT, or (iii) integrating them into his business only to the extent to which they are actually used for business purposes. Should the taxable person choose to treat capital goods used for both business and private purposes as business goods, the input VAT due on the acquisition of those goods is, in principle, immediately deductible in full. In those circumstances, when the input VAT paid on goods forming part of the assets of a business is wholly or partly deductible, their use for the private purposes of the taxable person or of his staff or for purposes other than those of his business is treated as a supply of services for consideration pursuant to Article 6(2)(a) of the directive.
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[39] It is also appropriate to state that, unlike Charles and Charles-Tijmens, which concerned immoveable property allocated to the assets of the business before being attributed, in part, to private use, by definition completely different from the business of the taxable person, the situation in the main proceedings in the present case relates to transactions other than VNLTO’s taxable transactions, consisting in safeguarding the general interests of its members, and not capable of being considered, in this case, to be non-business transactions, given that they constitute the main corporate purpose of that association.
[40] Consequently, the answer to the first question is that Articles 6(2)(a) and 17(2) of the directive must be interpreted as not being applicable to the use of goods and services allocated to the business for the purpose of transactions other than the taxable transactions of the taxable person, as the VAT due in respect of the acquisition of those goods and services, and relating to such transactions, is not deductible." (VNLTO C-515/07)
Apportionment necessary
- T cannot be given right to recover input relating to non-taxable activity on the basis of future deemed supply
"[36] Indeed, as the Advocate General observed in point 57 of her Opinion, to permit a taxable person, such as the Association of Municipalities, carrying out both economic and non-economic activities, to deduct the input VAT paid in respect of mixed expenditure in full would give it an advantage contrary to the principle of fiscal neutrality, which, in the Court’s view, was intended by the EU legislature to reflect, in matters relating to VAT, the general principle of equal treatment (see, to that effect, judgment of 29 October 2009, NCC Construction Danmark, C‑174/08, EU:C:2009:669, paragraph 41 and the case-law cited)." (Związek C-566/17)
Method of apportionment
- Directive silent, for Member State to determine
"[29] In the third place, it should be borne in mind that the Court has already held that, since the VAT Directive is silent on this point, the determination of the methods and criteria for apportioning input VAT between economic and non-economic activities falls within the discretion of the Member States. When exercising that discretion, Member States must have regard to the aims and broad logic of the VAT Directive and, on that basis, provide for a method of calculation which objectively reflects the part of the input expenditure actually to be attributed, respectively, to those two types of activity (see, inter alia, judgment of 25 July 2018, Gmina Ryjewo, C‑140/17, EU:C:2018:595, paragraph 58 and the case-law cited)." (Związek C-566/17)