6.3.3.3 Disposal free of charge (of goods, not services)

When comparing the two provisions that treat certain ‘free’ transactions as if they were performed for consideration, it becomes apparent that there are two differences between the provision that covers the application of goods and the provision that treats certain free transactions as services performed for consideration. Focussing on the provision regarding the application of goods, this provision contains a ‘transaction’ or ‘condition of application’ that is treated as if performed for consideration that is not included in the provision regarding services. Where services are treated as if performed for consideration if they entail use “for the private use of a taxable person or of his staff or, more generally, for purposes other than those of his business” or “services carried out free of charge by a taxable person for his private use or for that of his staff or, more generally, for purposes other than those of his business”, the application of business assets is taxed if a taxable person applies them “for his private use or for that of his staff, or their disposal free of charge or, more generally, their application for purposes other than those of his business”. The difference lies in the “or their disposal free of charge”. The question arises whether that disposal free of charge should be interpreted more broadly than the application for purposes other than those of the taxable person’s business, especially since that latter concept is preceded by the words “more generally”, implying that the disposal free of charge is, therefore, less general.

The CJEU has confirmed that this is, indeed the case. It has held that it is clear from the very wording of the relevant provision that it treats as a supply made for consideration, and therefore as subject to VAT, a taxable person's disposal free of charge of goods forming part of his business assets, where input VAT was deductible on those goods, it being in principle immaterial whether their disposal was for business purposes. The fact that the same provision precludes taxation of applications for the giving of samples or the making of gifts of small value for the purposes of the taxable person's business would, in the view of the CJEU, make no sense if the first part did not make VAT payable on the disposal free of charge of such goods by the taxable person, even where this is done for business purposes.1 This interpretation is also supported by the legislative history of the relevant provision,2 which provided inter alia that applications for the purposes of giving samples or making gifts of small value, eligible for classification as general expenses giving tax relief, were not — contrary to the general rule — to be considered as taxable transactions. It follows that, where the gifts are not of small value, such applications must be treated as taxable supplies, even where made for business purposes.3

Should this provision be interpreted so broadly that it includes non-economic activities? In my view, this should not be the case. The same reasoning that precludes non-economic activities from being covered by free use of business assets for purposes other than those of the business of the taxable person should apply here: such an interpretation would have the effect of rendering Article 2(1) of the EU VAT Directive meaningless.4 However, a case was ruled by the CJEU where a business property was applied, in lieu of payment, for the purpose of discharging a tax debt. In that case, the CJEU decided that any VAT recovered in relation to the property was covered by the provisions of Article 16 of the EU VAT Directive, eliminating any risk of an untaxed final consumption.5

It seems that the CJEU implies that non-economic use can be subject to VAT under that provision, because in its decision, the CJEU makes an explicit reference to the opinion of the Advocate General, who considered this transaction to be of an non-economic nature.6 However, in my view, this reference to the opinion can only be aimed at the VAT treatment of the use of the property, i.e. the application of the relevant provision (Article 16), and not to the actual nature of the transaction. The CJEU does not mention anything explicitly about this in its judgment. In my view, discharging a tax debt for which a business is liable should not be considered a non-economic activity, since tax debts often arise as a result of economic activities. Also, if a business were to outsource its tax compliance or procure tax advisory services, under the rationale of the Advocate General, these services might well be related to non-economic activities and therefore the VAT on the costs of these activities should not be recoverable either. This cannot be correct. In my view, such costs have a direct and immediate link with the taxable person’s economic activity as a whole.