Letting buildings as part of a TOGC

The AG has opined that where a property subject to the capital goods scheme is made available to the purchaser of a business as a going concern by way of a lease, the lease does not form part of the TOGC and therefore does not prevent the need to make adjustments to input VAT originally recovered in relation to the property: A&P Deco Nv v Belgium (Case T-397/25). (Note the Opinion is not currently available in English.)

Background

The taxpayer in this case carried on a garden centre business from the property concerned. It had originally recovered input VAT in relation to the conversion of the property into a garden centre, which was subject to the capital goods scheme (CGS). In 2013 it transferred the garden centre business to a purchaser who continued to carry on that business from the property. However, the property was not transferred as part of the sale and instead the taxpayer leased the building to the purchaser of the business with the rentals being exempt from VAT.

The Belgian tax authorities sought to adjust the input VAT recovery originally obtained by the taxpayer on the basis that its use of the property had now changes from taxable to exempt. The taxpayer, however, pointed to the CJEU decision in Schriever (Case C-444/10) in which it was held that the transfer of the assets of a business along with the letting of the building to the transferee amounted to a TOGC. On that basis, the taxpayer argued that the letting of the garden centre building in this case was effectively part of the TOGC which required that transfer to be ignored for VAT purposes. As the transfer was to be ignored, it could not affect the CGS calculation.

Moreover, the taxpayer argued that the effect of the TOGC was to put the transferee in the shoes of the transferor such that the CGS adjustment should be calculated by reference to the transferee’s use of the building. That use continued to be use as a commercial building for the making of taxable supplies.

AG opinion

The AG has noted that the decision in Schriever was not that the letting of the building was also part of the TOGC. Rather, the CJEU held that the letting of the property to the business purchaser enabled the continuation of the business. “However, it does not follow from that that fact that the letting of the commercial property, which takes place at the same time as the transfer of the commercial assets, is also part of the transfer of a total or partial totality of assets... At no point in the above-mentioned judgment did the Court suggest this interpretation. On the contrary, in the reasoning of the decision, the Court classifies the situation as being a 'case in which the totality of assets transferred does not include immovable property' and counts, for 'all the assets transferred', only the stock of goods and commercial equipment.”

Accordingly, the letting of the building is not part of the TOGC, is not ignored for VAT purposes and constitutes exempt use of the building requiring an adjustment to be made by the taxpayer of its original input VAT deduction.

In any event, the AG noted that, even if that were incorrect and the lease was part of the TOGC, it would not prevent the CGS adjustment. As the AG notes, although this analysis would mean that there were not exempt supplies, the taxpayer would still no longer be using the property for taxable transactions. This would be a change in the factors taken into account in determining deductions under the CGS and require an adjustment to the input VAT originally recovered.

In addition, the AG notes that even if the transferee is taken to have acquired the lease under a TOGC, that is not the same interest as owned by the transferor. As such, the transferor continues to have a right over the property for VAT purposes and it is the use of that right that is relevant for the purposes of calculating the adjustment of the original input VAT recovery under the CGS.

Comment

The AG’s opinion in this case is difficult to argue with. The CJEU decision in Schriever was essentially that it was not necessary for the property to be transferred for the TOGC provisions to apply to the business transfer as long as it was made available in a way that enabled the continuation of the business. The CJEU did not thereby hold that the letting of the property was part of the TOGC.

In this context, it is worth noting the judgment in Mydibel (Case C-201/18), which involved a sale and leaseback of premises, where the CJEU held there was no need to make CGS adjustment where the business continued to use the premises for its taxable business despite having made an exempt sale followed by the leaseback. However, the AG also distinguished this case on the basis that there was no ongoing taxable use of the building by the taxpayer.