6.3.1 VAT deduction: a fundamental principle underlying the system of VAT that, in principle, may not be limited

The right to deduct VAT, as an integral part of the VAT scheme, is a fundamental principle underlying the common system of VAT that in principle may not be limited.1 It is exercisable immediately in respect of all the taxes charged on input transactions.2 The deduction system is intended to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities. The common system of VAT consequently ensures neutrality of taxation of all economic activities, whatever their purpose or results, provided that they are themselves subject in principle to VAT.3

Insofar as the taxable person, acting as such at the time when he acquires goods or receives services, uses those goods or services for the purposes of his taxed transactions, he is entitled to deduct the VAT paid or payable in respect of those goods or services. The existence of a direct and immediate link between a particular input transaction and a particular output transaction or transactions giving rise to the right to deduct is necessary, in principle, before the taxable person is entitled to deduct input VAT and in order to determine the extent of such entitlement.4

The right to deduct VAT charged on the acquisition of input goods or services presupposes that the expenditure incurred in acquiring them was a component of the cost of the output transactions that gave rise to the right to deduct.5

A taxable person also has a right to deduct even where there is no direct and immediate link between a particular input transaction and an output transaction or transactions giving rise to the right to deduct, where the costs of the services in question are part of his general costs and are, as such, components of the price of the goods or services which he supplies. Such costs do have a direct and immediate link with the taxable person’s economic activity as a whole. On the other hand, 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.6

The tax authorities and the national courts, in the context of the direct-link test that is to be applied by them, should consider all the circumstances surrounding the transactions concerned and take account only of the transactions which are objectively linked to the taxable person’s taxable activity. The existence of such a link must thus be assessed in the light of the objective content of the transaction in question.7

The CJEU has repeatedly held that if costs can be directly attributed to the application of capital business assets or of services for private consumption,8 the VAT on the costs attributable to these activities can be deducted because these activities are treated as supplies for consideration.9

Giving away goods or services for free as a promotional activity, possibly through the use of vouchers, is intrinsically linked to and performed for the purpose of a business’ main activities: selling goods or services and increasing those sales. This means that even though giving away goods or services for free or allowing (potential) customers to use goods or services free of charge, could be qualified as consumption that should be taxed, VAT on these (business) costs should (also) be deductible.