7.5.1 Case 1

A constructor builds a new hospital. When the construction is finished and the new hospital is officially opened, the constructor gives a present to the operator of the hospital (e.g. a work of art).

The constructor is not allowed to deduct the input VAT on the purchase of the present, since the hospital would not be allowed to deduct the input VAT if it had purchased the work of art itself. This is under an old Decree (Besluit uitsluiting aftrek omzetbelasting 1968) which can still be applied under the transitional arrangement of art. 176 VAT-directive.

If this old Decree were not applicable it is not certain whether a deemed supply would take place since it is questionable whether the constructor uses the present ‘for purposes other than those of his business’. If, however, a deemed supply takes place, just because the present is disposed of free of charge, the result would not be ‘in conformity with Elida Gibbs’. As the hospital cannot deduct the VAT on the construction costs of the new hospital, eventually VAT would be payable on a larger amount than the hospital actually paid to the constructor. This can be avoided by qualifying the gift as a rebate in kind, which allows the constructor a reduction on the VAT paid on the original price for the construction.

This is dealt with under the business gift rules. When the constructor has been entitled to claim input VAT and the cost of the gift is more than £ 50, output VAT for a deemed supply is payable by the constructor.

If the constructor purchased the present already with the intention to give it away for free, he cannot deduct input VAT.1 If he did not, and deducts input VAT, the transaction is a deemed supply without consideration and taxable at the standard rate unless the value of the gift stays below the minimum threshold of € 35.2

The constructor cannot deduct input VAT on the purchase of the piece of art, unless it is below the threshold for VAT recovery on goods delivered for free (€ 60, VAT included).3