6.3.3.8 The recipient’s VAT status and his use of the free supply

The aim of the provisions regarding the taxation of the application or use of goods or services for private consumption purposes is to ensure equal treatment as between a taxable person who applies goods or services for his own private use or for that of his staff and a final consumer who acquires goods or services of the same type.1

Under this rationale, in my view, it does not make sense to tax the free supply of goods or services to businesses that would be able to fully recover the VAT on these supplies and that would not have to pay VAT on the deemed application or use for private purposes, if these goods or services had been supplied directly to them. In other words, if a business receiving free goods or services would not need to adjust the VAT2 on the costs of those goods or services if he had incurred those costs directly, there is, in my view, no private consumption; otherwise, an adjustment would be required. For example, if a construction company purchases a new work of art (e.g. a statue) and presents this as a gift to a fully taxable business for which they just finished the construction of a new office building, and where they know that this business may purchase more real estate in the future, taxing this present does not, in my view, achieve the goal of ensuring equal treatment as described above, because the business that purchased the new office building would have been able to recover the VAT on the statue without having to make any adjustments if it would have purchased that statue directly from the artist.

Some taxpayers have identified this issue – the fact that providing free gifts to a fully taxable business may lead to taxation, even where that business could have deducted the VAT on the costs of those gifts if purchased directly – as well. However, the CJEU, when asked its view on this issue, held that “(…) it is apparent from that provision that it does not draw any distinction on the basis of the tax status of the recipient of samples (…)”.3

As mentioned before, in my view, the application of the relevant adjustment rules in situations where the recipient of the supply could have deducted the VAT on the supply does not seem in line with the purpose of the provision, i.e. to ensure equal treatment as between a taxable person who applies goods or services for his own private use or for that of his staff and a final consumer who acquires goods or services of the same type, if only because in this case the recipient is not (or does not act in the capacity of) a final consumer. Taxing this supply (the supply by the construction company to its customer) leads to unjust enrichment of the tax authorities: there should be no VAT burden on this transaction. Unfortunately, as with the provisions regarding the taxation of the private use of services, the wording of the relevant provision is sufficiently clear,4 precise and unconditional and therefore, under this provision, this type of supplies for no consideration will be subject to tax. As I said earlier about the provisions regarding the taxation of the private use of services, I would strongly suggest changing the wording of this provision to make it more in line with what is, in my view, its purpose. Not taxing these transactions would, in my view, also better reflect economic and commercial reality (as a species of neutrality) in the sense that VAT should not be a burden in a commercial chain of transactions where all businesses in that chain have the right to deduct VAT.