Letting and leasing of machinery fixed to land

The CJEU has confirmed the Advocate General's opinion that the provisions of Article 135(2)(c) of the Principal VAT Directive, which exclude from the exemption for the leasing and letting of immovable property the "the hiring of tools and machinery permanently fixed", do not override the application of the single supply rule: Finanzamt X v Y (Case C-516/21).

As such, plant and machinery fixtures supplied with a building and which are ancillary to the use of the building are not subject to VAT where the supply of the building is exempt. The decision is in line with earlier case law of the CJEU concerning other exclusions from exemption contained in Article 135(2), such as the exclusion for parking spaces.

Background

Y leased turkey barns with permanently fixed tools and machinery, comprising in particular an industrial spiral conveyor and a heating, ventilation and lighting system specially adapted to the contractual use of the building in as a barn for rearing such poultry. Under the provisions of the farm lease, Y received a single remuneration, which was not divided between, on the one hand, the provision of the livestock building and, on the other, that of the tools and machinery. Y considered that the entire lease was exempt from VAT pursuant to Article 135(1)(l) covering the "leasing and letting of immovable property".

The German tax authorities disagreed, however, arguing that the letting of the machinery and equipment was a separate taxable supply on the basis of German legislation implementing Article 135(2)(c) which excluded from the exemption in Article 135(1)(l) "the hiring of tools and machines permanently fixed".

On appeal, the German courts referred to the CJEU the question whether, in essence, Article 135(2)(c) overrode the application of the normal single supply rules.

Decision of the CJEU

Reviewing earlier case law on single supplies, the Court has held that it is clear that Article 135(2) of the VAT Directive does not operate as a mandatory splitting clause, as the German Government claimed.

In particular, the Court pointed to the decision on the exception for the letting of parking spaces in Article 135(2)(b) in Henriksen (Case C-173/88). In that case, the Court stated that the concept of 'letting of immovable property' necessarily included, in addition to the letting of property, the letting of all the goods which are ancillary to it. The Court concluded that the letting of space for the parking of vehicles could not be excluded from the exemption where that letting was closely linked to the letting itself, which is exempt, of buildings intended for another use, such as residential or commercial buildings, in the sense that the two leases form a single economic transaction.

Accordingly, the treatment provided for in Article 135(2)(c) does not apply where the hiring or leasing of tools and machinery is ancillary to the principal supply, which is the letting or leasing of a building. Whether in fact the supply of tools and machinery is simply ancillary to the principal supply of the property is a matter for the local courts to determine but the CJEU noted that the local courts in this case had made clear that they regarded the supply of the property and the attached machinery in this case as a single supply with the machinery ancillary to the supply of the property.

Accordingly, the CJEU has held that Article 135(1)(l) and Article 135(2)(c) of the VAT Directive must be interpreted as meaning that the exception from the exemption for the leasing of a building for fixed tools and machinery does not apply where those tools and machinery are supplied between the same persons and form part of a single economic supply with the property.

Comment

There have been a number of attempts both by tax authorities and taxpayers to restrict the application of the single supply rules in recent years, following the successful arguments along these lines in the French undertakers case (EC v France (Case C-94/09)) and Talacre Beach Caravan Sales (Case C-251/05). These further cases have generally been unsuccessful however and it is clear that such treatment will require there to be 'concrete and specific aspects' of a supply for which legislation has provided a particular VAT treatment which, as a matter of statutory construction overrides the normal application of the same rate of VAT to all aspects of a single supply. It is perhaps somewhat surprising, therefore, that these were not referred to in the course of the judgment.

The German government also sought to rely on the final sentence of Article 135(2) to justify the domestic provisions, which states that "Member States may provide for additional exclusions from the scope of the exemption provided for in paragraph 1(l)." However, neither the AG nor the Court commented on this issue as it had not been formally referred to the CJEU by the German courts.

The opinion is in line with the UK treatment of fixtures. Notice 742 para 7.9 states that "If fixtures and fittings are included with a building or land they are not treated as separate supplies for VAT purposes. This means that their liability is the same as that of the land or building with which they're being supplied."