6.7 Summary

Goods and services are often provided free of charge as a business promotion, with or without the use of a voucher. Giving away goods and services for free to customers leads to consumption. As VAT is aimed at taxing (expenditure for) local private consumption, I have researched in this Chapter the current and appropriate or desirable VAT treatment of free supplies, taking into account the tension between the right to deduct VAT on business related costs and the need to tax consumption. I used the EU concept of ‘commercial and economic reality’ as well as the purpose of the relevant EU VAT rules to establish the VAT treatment of supplies made for no consideration.

As a general rule, the VAT on the purchase for goods and services purchased by a taxable person acting as such, where these goods and services are purchased at least partially for taxed business purposes, can be fully deducted. Insofar as these goods or services are also used for non-economic activities, the VAT on the costs relating to these non-economic activities cannot be deducted.

The subsequent application of those goods, forming part of the business assets of the taxable person, for his private use or for that of his staff, or their disposal free of charge or, more generally, their application for purposes other than those of his business, shall be treated as a supply of goods for consideration, where the VAT on those goods or the component parts thereof was wholly or partly deductible. Application for non-economic activities is not covered by ‘for purposes other than those of his business’. The application of goods for business use as samples or as gifts of small value shall not be treated as a supply of goods for consideration.

The subsequent use of the goods forming part of business assets for the private use of the taxable person or of his staff or, more generally, for purposes other than those of his business, where the VAT on such goods was wholly or partly deductible, as well as the supply of services carried out free of charge by the taxable person for his private use or for that of his staff or, more generally, for purposes other than those of his business, shall be treated as a supply for consideration. If the element of private consumption is so small, compared to the business reasons for making the free supply, that the supply is, in fact, not made for purposes other than those of the business of the taxable person, the transaction will not be taxed.

The above rules do not apply to the purchase and application or use of immovable property for private purposes. Special rules apply, where the VAT on costs can only be deducted insofar as the property is used for actual taxed activities, and a yearly adjustment system applies. It is also possible that the VAT on certain expenses is not deductible for other reasons, for example if a Member State applies non/recovery rules from before the accession to the EU under a standstill provision. Also, the VAT on expenses for capital goods owned by third parties is only deductible if the expenses do not exceed what is objectively necessary to allow a business to carry out its taxed transactions.

For transactions leading to private consumption that are treated as if they were performed for consideration, the taxable amount is either the purchase price of the goods or of similar goods or, in the absence of a purchase price, the cost price, determined at the time when the application takes place (for the application of business assets) or full cost to the taxable person of providing the services (for services).

Even though the relevant provisions entail that certain transactions are treated as supplies for considerations, not all relevant VAT provisions automatically apply to these transactions in the same way as they would to ‘regular’ transactions for consideration as performed by a supplier for his customer. This is especially true for the rules for determining the place of supply and the rules regarding the application of a VAT exemption with credit.

Establishing the appropriate VAT treatment of free supplies helps me to establish the appropriate VAT treatment of vouchers, which I do in Chapter 9.