6.3.3.4 Taxation of the application and the use of capital assets (continued)

Under the current EU VAT rules, VAT incurred on the purchase of capital goods can be deducted if the good is purchased by a taxable person acting as such,1 where the goods are assigned to his business assets.2 As mentioned, this does not apply to immovable property forming part of the business assets of a taxable person and used both for purposes of the taxable person’s business and for his private use or that of his staff, or, more generally, for purposes other than those of his business.3

Where capital goods are used both for business and for private purposes the taxpayer has the choice, for the purposes of VAT, of allocating those goods wholly to the assets of his business, retaining them wholly within his private assets, thereby excluding them entirely from the system of VAT, or integrating them into his business only to the extent to which they are actually used for business purposes.4

Should the taxable person choose to treat capital goods used for both business and private purposes as business goods, the input VAT due on the acquisition of those can be deducted immediately and in full insofar as the goods are used for non-exempt business activities, not taking into account the private use as taxable activities.5^,6

However, it follows from Article 75 of the EU VAT Directive that when the input VAT paid on goods forming part of the assets of a business is wholly or partly deductible, their use for the private purposes of the taxable person or of his staff or for purposes other than those of his business is treated as a supply of services for consideration. That use, which is therefore a ‘taxable transaction’ within the meaning of that directive, is taxed on the basis of the cost of providing the services.7

Subsequent use for business purposes of the part of the goods allocated to private assets is not capable of giving rise to a right to deduct, because the relevant provision in the EU VAT Directive lays down that the right to deduct is to arise at the time when the deductible tax becomes chargeable. There is no adjustment mechanism to that effect under Union legislation as it stands.8

Taxable persons who carry out only exempt transactions can generally not deduct any input tax and also, therefore, cannot claim deductions concerning the use for private purposes of mixed-use goods.9 Equally, with regard to taxable persons carrying out both exempt transactions and taxable transactions, there is no conflict between the proportions of private and business use and the proportionate deduction provided for under the EU VAT Directive.10

By treating the private use of goods that form part of the assets of the business of a taxable person as a supply of services for consideration, the EU VAT Directive aims, first, 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, and, second, to ensure fiscal neutrality by ensuring a correspondence between deduction of input VAT and charging of output VAT.11

This means that, under the current EU VAT rules, the VAT incurred on the purchase of capital goods that are purchased by a taxable person which he has ‘labelled’ as business assets and that will be used for his business activities as well as for private consumption purposes, is fully deductible, unless the taxable person also uses the capital goods for exempt business activities of for non-economic activities. The subsequent consumption (private use) is subject to VAT.

Not all situations where a capital business asset is applied or used for consumptive purposes, however, is treated as a supply for consideration. I will elaborate on this below, in Section 6.4.

In most of the CJEU case law about this specific issue, the taxable person either applies or uses a capital business asset for private consumption purposes. This raises the question whether the same VAT rules, i.e. full VAT deduction followed by taxation of the private consumption, also applies to non-capital goods and to services.