6.2.2 VAT consequences of non-economic activities

Transactions that are not economic activities, even if they are made for consideration, are outside the scope of VAT.1 This means that the VAT on costs incurred in relation to non-economic activities cannot be deducted, because under Article 168 of the EU VAT Directive, VAT on the purchase of goods or services can only be deducted in so far as the goods and services are used for the purposes of the taxed transactions of a taxable person. Also, the CJEU has confirmed in the VNLTO case2 that the mechanism included in the VAT Directive, which allows deduction of VAT on certain purchases of capital goods followed by taxing the ‘non-business’ or consumptive use of these goods, does not apply to situations where these goods are used for non-economic activities. However, this seems to be different in situations where the VAT on the costs of capital goods was already deducted and where the business use decreases after the initial deduction.3 I will elaborate on this in Section 6.3.2.1.