6.4.1 The element of private consumption can be so small, compared to the business reasons for making the free supply, that no adjustment needs to be made

When goods or services are used or supplied free of charge by a business without any private consumption occurring, there is in principle no need to tax the supply or make an adjustment of the VAT deducted on the costs of making the free supply (of goods or services). This can be different if, for example, goods are initially purchased by a taxable part of a business that deducts all VAT on the purchase of the goods and where the goods are subsequently transferred to a VAT exempt part of the business that would not have been able to deduct the VAT if it had purchased those goods itself. This situation is foreseen by the EU legislator and under the current EU VAT rules, EU Member States may tax the application of goods by a taxable person for the purposes of a non-taxable area of activity, where the VAT on such goods became wholly or partly deductible1 and the supply of a service for the purposes of his business, where the VAT on such a service, were it supplied by another taxable person, would not be wholly deductible.2 However, this taxation system falls outside the scope of this research because it is unrelated to promotional activities.

Under the current EU VAT rules, the initial deduction of VAT shall be adjusted where it is higher or lower than that to which the taxable person was entitled, e.g. because the goods were purchased for business use but are applied for private consumption.3 Provisions have been included in the EU VAT Directive to avoid this adjustment in the case of goods reserved for the purpose of making gifts of small value or of giving samples.4 Even though this is not explicitly included in that provision, in my view, the same should apply (i.e. no adjustment should be made) when the goods or services are supplied free of charge for business purposes. In cases where the element of personal consumption/personal advantage derived from a supply that is made free of charge, is merely accessory to the requirements of the business for making that supply, the ‘consumption-element’ follows the VAT treatment of the free business supply, which should be considered to be made for no other purposes than those of the business. In those cases, no adjustment of deducted VAT should be required, because the costs on which the VAT was incurred are (still) considered to be made only for business purposes.5 In other words, where the personal benefit or consumption that is a result of a free supply is considered of only secondary importance compared to the needs of the business, no taxation (or other adjustment) should occur.6 Where VAT was only partially deducted due to the fact that the business performs activities that are exempt without credit and the purchases were considered ‘overhead’, the adjustment through taxation only needs to be made insofar as VAT was deducted.

According to the dictionary, ‘accessory’ means ‘contributing to or aiding an activity or process in a minor way’.7 Whether or not the ‘private consumption’-element of a free supply can be considered accessory to the business purposes of the supply may depend, inter alia, on the particular characteristics of the supply, the specific requirements of the business and the manner in which the business is organised.8

In my view, the above implies that when a free supply is considered to be made for business purposes only, because the element of private consumption can be ignored, there is no reason to apply the provisions in the EU VAT rules concerning a VAT adjustment as a result of changes in the factors used to determine the amount that was initially deducted9 either.