6.6.5 Deduction of input VAT

Under the relevant provisions regarding the deduction of VAT, VAT incurred or due on the purchase of goods or services used for taxed transactions can be deducted.1 Because the supply of free goods or services for consumption purposes is a taxed transaction, the VAT incurred on the cost of these supplies can be deducted insofar as the business incurring these costs has the right to deduct input VAT. I elaborated on this in Section 6.3.3.4.

VAT on costs of goods or services used by a taxable person both for transactions in respect of which VAT is deductible and for transactions in respect of which VAT is not deductible, only such proportion of the VAT as is attributable to the former transactions shall be deductible.2 As a general rule, the deductible proportion shall be made up of a fraction comprising as a numerator, the total amount (exclusive of VAT) of turnover per year attributable to transactions in respect of which VAT is deductible and a denominator, the total amount (exclusive of VAT) of turnover per year attributable to transactions included in the numerator and to transactions in respect of which VAT is not deductible.3

A relevant question for this thesis is whether the taxable amounts regarding the free supply, disposal or use of business assets and services should be considered ‘turnover’ for the purpose of the above provision regarding the calculation of the deductible proportion. In the dictionary, ‘turnover’ is defined as ‘the amount of money taken by a business in a particular period’.4 Because businesses do not make any money (or at least not as a consideration from a VAT perspective) for their free supplies, no turnover in the general sense of the word is generated by these transactions.

There is only one provision in the EU VAT Directive that explicitly includes a definition of ‘turnover’, where turnover is used as a measure to determine whether a special scheme can be applied.5 Under this definition, “the value of supplies of goods and services, in so far as they are taxed” is considered turnover. However, in my view, the taxable amount for the transactions that are treated as if they were performed for consideration should not be considered turnover in the sense of the VAT rules and regulations. I find substantiation of this view in CJEU case law that determines that “in so far as the taxable person has not issued any invoice (…) and has received no payments (…), that work does not constitute the delivery of goods or the provision of services (…) by the taxable person (…). It must not therefore be included in the denominator of the fraction referred to in Article 19(1) of the Sixth Directive for the calculation of the deductible proportion.”6