6.3 VAT consequences of supplies not made for consideration

Under the relevant EU VAT rules, supplies of goods and services are only taxable if they are made for consideration.1 Because VAT is a tax on consumption,2 transactions for no consideration that lead to consumption should also be taxed.3

Full deduction of VAT on costs for goods or services that will be (partially) used for consumption purposes followed by taxing the consumption is preferable over disallowing deduction, because the principle of the neutrality of VAT with regard to the taxation of the business requires that the investment expenditure incurred for the needs and objectives of a business be regarded as economic activities giving rise to an immediate deduction of input VAT due. 4 The deduction system is meant to relieve the taxable person entirely of the burden of the VAT payable or paid in the course of all his taxable economic activities.5

The main reason for me to prefer the deduction system followed by taxation of consumption is that, at the time of deduction, the exact (extent or timing of any) private use is often not known. As examples I mention a company car that is also used for commuting (which, from a VAT perspective, is considered private use) or the purchase by a shop-owner of a large number of pots of jam, some of which he will take out of his stock for private use. At the time of the purchase and initial VAT deduction, it is only possible to make an (educated) estimate of the actual (amount of) private use. Therefore, disallowing deduction will in most cases not lead to taxation of actual private use, unless this is done retroactively. This can only be the case if the initial deduction can later be adjusted (i.e. increased or decreased), which is, in fact, similar to an adjustment made by taxing the private use. Disallowing deduction of VAT on costs attributable to consumption is in my view a viable alternative that would avoid the ‘financial advantage’ for taxpayers of full deduction followed by staggered imposition of VAT on the consumptive use of the good.6 However, I prefer the first system because this allows businesses not having to pre-finance VAT (by not deducting it) on possible, uncertain future consumption. VAT should preferably be imposed on actual consumption rather than on predicted or foreseen, estimated consumption.7

I will first discuss situations where no deduction of VAT is allowed and then the system of, in principle, full deduction followed by taxation of private use.