3.9 Summary – transactions that are subject to VAT and economic activities

Supplies of goods and supplies of services are only subject to VAT if performed for consideration by a taxable person acting as such, within the territory of a Member State. They have to be economic activities to be within the scope of VAT. Some supplies are subject to VAT even if they are not performed for consideration. Other transactions are not considered supplies that are subject to VAT, even though they are performed for consideration by a taxable person. This can be because the taxable person is not acting ‘as such’ or because the activities do not qualify as economic activities.

For a supply of goods or services to be subject to VAT, the supply has to be based on a legal agreement between the supplier and the recipient. The supply has to be made for consideration, which also has to be based on the legal agreement. There has to be a direct link between the supply and the payment, meaning that the consideration received by the supplier is the real and effective counter-value of the supply.

Under the relevant EU VAT rules certain supplies that are not made for consideration can still be subject to VAT. These transactions are treated as if they were made for consideration. As mentioned before, this mechanism only applies to supplies made free of charge that are economic activities.1 This can be visualised in the below diagram, where the horizontal axis represents whether a transaction is made for consideration or not, and the vertical axis represents whether the supply qualifies as an economic activity. Only two out of the four quadrants contain supplies that are or that can be subject to VAT:

In Chapter 6 I will examine the VAT treatment of making supplies free of charge, and in Chapter 4 I will examine the VAT treatment of composite supplies.