10.3.7 Can the VAT on costs incurred for performing promotional activities always be fully deducted? Should it always be deductible?

The VAT deduction system is meant to relieve businesses entirely of the burden of the VAT payable or paid in the course of all their economic activities. Based on consistent CJEU case law, the EU VAT system consequently ensures complete neutrality of taxation of all economic activities, whatever their purpose or results, provided that they are themselves subject in principle to VAT.

To give rise to the right to deduct VAT, the goods or services acquired must have a direct and immediate link with the output transactions which give rise to the right to deduct. In principle, the existence of a direct and immediate link between a particular input transaction and a particular output transaction or transactions giving rise to the right to deduct is necessary before a taxable person is entitled to deduct input VAT and in order to determine the extent of such entitlement.

I did not include a separate Chapter on VAT deduction. VAT deduction was included in all Chapters where it was a relevant issue. In my view, VAT on costs incurred for performing promotional activities can and should always be fully deducted, unless the costs are related to VAT exempt activities.

This means that VAT deduction should not be affected by the fact that supplies are made free of charge. Where no VAT is charged on the supply of free goods or services, VAT deduction is still ensured under the relevant EU VAT rules. This also means that VAT deduction should not be affected by the answer to the question whether certain elements to a multiple-element supply are made free of charge.

Under the current EU VAT rules, the costs of goods and services acquired by the organiser of a free lottery do not have a direct and immediate link with the free lottery activities. This means that the VAT incurred on the costs of these goods and services can be deducted as VAT on ‘general costs’ or ‘overhead costs’, following the general VAT deduction right of the business.

As a general rule, promotional activities are business activities, and the VAT on the cost of performing promotional activities should be deductible. As a main rule, this is the case under the current EU VAT rules and case law and in my view, this is in line with the relevant underlying principles of VAT and the economic and commercial reality of performing promotional activities.