6.5.2 Taxing free services

As I described above, the supplies of services that are covered by the provision that deems these transactions to be supplies of services made for consideration are the use of business assets, insofar VAT has been deducted on the purchase of these goods was wholly or partly deductible and the supply of other services free of charge, both for, in short, private consumption purposes.1 The taxable amount for these two types of taxable transactions is the same: the full cost to the taxable person of providing the services.2 I elaborated on the fact that in my view, ‘the full cost’ clearly implies that also cost components on which no VAT was incurred or deducted should be included in the taxable amount. This is supported by the fact that for services that are not the use of business assets, VAT deduction is included in the relevant provision as a requirement for taxing the supply of the service.3

I also elaborated on the fact that CJEU case law exists where services purchased from third parties are ‘resupplied’ for free seem to be covered by the relevant provisions, which leads me to the conclusion that the provisions indeed apply to purchased services as well. CJEU case law I quoted in the previous section seems to imply that the ‘regular’ VAT adjustment rules should apply to purchased services, but because this case law specifically deals with services that were performed to increase the value of a good, I will not apply this ‘rule’ to all services. As I explained, in my view the ‘adjustment through taxation’ rules should apply to most purchased goods or services that are subsequently applied or used for consumption purposes, unless the EU legislation specifically says differently. This is in my view supported by the fact that the EU legislator made a deliberate choice in favour of adjustment through taxation, stating that the same goal (avoiding non-taxation of private consumption) could have been achieved through the application of the ‘regular’ adjustment system, but that the ‘adjustment through taxation’-system was chosen for reasons of impartiality and simplicity.4 This means that, in my view, the main adjustment system, also for bought-in services, should be taxing the free supply of the goods or services.

The taxable amount for services that are used/supplied for private consumption is the full cost of providing these services. The aim of the relevant provision is to ensure equal treatment as between a taxable person, who was able to deduct the VAT on the acquisition or construction of those goods, and a final consumer, by preventing the former from enjoying an advantage to which he is not entitled by comparison with the latter who buys the goods and pays VAT on them.5 To me, it makes sense to include the value of ‘internal services’ such as labour, on which no VAT was incurred (and therefore not deducted) in the taxable amount because a final customer would have had to pay VAT on these services.

The above may sometimes lead to situations of (seemingly) unequal treatment where the supply of goods includes a large labour component, e.g. the supply of prepared food. When it is a supply of goods, the labour component remains untaxed, and when it’s a supply of services, the labour component should be included in the taxable amount.

Similar to the free supply of goods, in my view, the taxable amount should only include ‘direct costs’ and not overhead cost components such as ‘use of office space’, depreciation costs of business assets used for performing a service etc. Even though the relevant provision states that the taxable amount should be ‘the full cost’ of providing the relevant service, ‘general costs’ should in my view not be included, if only because this would make an exact calculation of the taxable amount virtually impossible. Also, from a more principled view, including general costs would diverge too far form an adjustment principle whose aim could also be achieved by the (general) adjustment mechanism.