6.3.2.4 No recovery of VAT on costs under the ‘stand still’ provision

Even though the ‘main rule’ for ensuring the taxation of private consumption is allowing full VAT recovery followed by taxing the private consumption as if it were a supply ‘for consideration’, Member States are allowed to retain all the exclusions provided for under their national laws at 1 January 1979 (the date that the Sixth VAT Directive came into force) or, in the case of the Member States which acceded to the Union after that date, on the date of their accession.1 This is (supposed to be) a transitional measure, whereby Member States are allowed to maintain their rules until the Council has determined the expenditure in respect of which VAT shall not be deductible.2

In the first half of the eighties of the last century, the Commission submitted two proposals to the Council in which the deduction of VAT on certain specific expenditures was wholly or partially excluded.3 In these proposals, the VAT on some specific expenditure would no longer be (fully) deductible, because these types of expenditure, even where incurred in connection with the normal operation of a business, nevertheless have the characteristics of final consumption and apportionment of such expenditure between business and private use cannot be accurately verified, and because the nature of such expenditure presents the risk of abuse or tax evasion, not only on the part of resident taxable persons, but also on the part of non-resident taxable persons who are entitled to the refund of tax in a Member State other than that in which they are resident.4 The specific expenditures included in these proposals, for which the VAT would no longer be (fully) deductible, were:

The proposal was withdrawn in 1996, because the European Council could not come to an agreement on the proposed rules.5^,6 The proposal was succeeded by a new proposal that was never adopted for the same reasons.7

Even though this is not explicitly mentioned anywhere, the proposed rules for not allowing VAT deduction on certain expenditure seem limited to goods and services that are, by their nature, able to be used simultaneously or consecutively for both business and private (non-business) purposes. Examples of simultaneous ‘mixed’ use are entertainment, business dinners and the use of hotel accommodation during business trips. It can be argued that, since it would be difficult to determine what part of these supplies is actually solely used for business purposes, simplification would help in the way of rules determining that for certain of these costs, VAT cannot be deducted. The same reasoning could be applied to business assets and services that can only be used for either business or private (non-business) purposes as a whole, but never at the same time. Examples of this type of expenditure would be the lease of a company car and mobile phone subscriptions for a periodical fixed fee. At first sight, the proposed rules for disallowing VAT deduction on certain expenditure are not limited to these types of expenditure. For example, a part of a building that is intended primarily for entertainment can be easily separated ‘geographically’ from the rest of a building. The same applies to a whole building that is intended primarily for entertainment: there is no ‘mixed’ use. However, in my view, entertainment itself can be qualified as a form of mixed use, since it also serves business purposes. This implies that these rules were aimed at avoiding difficulties with regard to determining the business element in these types of dual-use goods and services. This view is supported by what the Commission has included in the Explanatory Memorandum to the proposal: “(…) In addition, since certain categories of expenditure, even where incurred in connection with the normal operation of a business, often serve private needs too and since apportionment of such expenditure between business and private use cannot be correctly verified, (...)”. Such apportionment and verification thereof should not lead to problems in situations where distinct parts of a business asset are always used for business purpose, and other parts are always used for private purposes, e.g. certain rooms or areas in buildings.

Some argue that the provisions regarding non-recovery of VAT (Art. 176 of the EU VAT Directive) and the mechanism where VAT is charged on free transactions that are treated as if they were supplies for consideration (Articles 16 and 26 of the EU VAT Directive) are mutually exclusive, meaning that the former mechanism is meant to apply to expenditure of a ‘mixed’ nature, where business purposes and private or non-business use both occur, whereas the adjustment that taxes transactions that are performed by a taxable person ‘for purposes other than those of his business’ can only apply to transactions that are ‘wholly extraneous to those of the taxable business’.8

I disagree: the fact the actual use of business assets ‘for purposes other than those of a taxable person’s business’ shows that certain business assets can, apparently, be used both for business use as well as private use. Nowhere in the wording of the relevant provisions is it suggested that these provisions only apply if that use is ‘wholly extraneous to those of the taxable business’. This is also clearly demonstrated in the CJEU case law on the application of the relevant provisions that tax supplies that are treated as if they were performed for consideration. Several of these cases dealt with exactly the activities that were included in the proposals that would arrange for the VAT on expenditure on these activities not to be deductible: the purchase, manufacture, importation, leasing or hire, use, modification, repair or maintenance of passenger cars,9 as well as the supply of accommodation10 and food and drink.11 This demonstrates that these types of activities, which clearly qualify as ‘dual use’ activities in the sense that they serve both business as well as private purposes, can also qualify as supplies made by a taxable person for purposes other than those of his business. I will now discuss the mechanism where private use or use for purposes other than those of the business is taxed.

Under the current interpretation of the EU VAT rules, the exclusions which Member States may retain pursuant to the relevant provision should have been lawful under the Second Directive, which pre-dated the Sixth Directive. In this respect, the relevant provisions of the Second Directive provided that the Member States could exclude from the deduction system “certain goods and services, in particular those capable of being exclusively or partially used for the private needs of the taxable person or of his staff”. This provision did not therefore confer on Member States an unfettered discretion to exclude all, or almost all, goods and services from the right of deduction. This means that the option given to Member States requires those Member States to adequately define the nature or the purpose of the goods and services in respect of which the right to deduct is excluded, in order to ensure that that option is not used to authorise general exclusions from that system.12

The most common categories of expenditures for which the deduction of VAT is excluded are: fuel, hiring of means of transport, other expenditure relating to means of transport, road tolls and road user charge, travel expenses, such as taxi fares, public transport fares, accommodation, food, drink and restaurant services, admissions to fairs and exhibitions and expenditure on luxuries, amusements and entertainment.13