10.3.4 Which free supplies are and should be taxed and how can this be best achieved?

EU VAT is a tax on a tax consumption that is levied by taxing expenditure for local private consumption. If supplies are made for no consideration and these supplies are ‘consumed’ (i.e. they leave the production and distribution chain and are used or applied for consumptive purposes), these supplies should also be taxed. This can be done by either disallowing deduction on the expenditure for these transactions (either at the time of purchase or retroactively) or by treating these supplies as if they were made for consideration, which means taxing them.

The EU legislator has chosen to apply the latter method of treating certain supplies that are made free of charge as if they were made for consideration. This latter method is preferable to disallowing full or partial VAT deduction at the time of the purchase of goods or services, because that entails a certain degree of arbitrariness that does is not in line with the relevant principles underlying the EU VAT system. Retroactive adjustment of an earlier deduction as based on consumptive use or application has more or less the same effect as taxing the consumptive use or application of goods or services. Taxing these transactions has the benefit that it is easier to apply in practice because the VAT amount initially deducted does not have to be apportioned over a period of time or between business and private use.

Where the business purpose for the free supply or application of goods or services predominates the private consumption, no adjustment should be made. Under the current rules, this rationale is applied to the free supply of services but not to the free supply or application of business assets (goods). These are, as a general rule, treated as if they were made for consideration, and therefore subject to VAT, unless the relevant goods qualify as samples or as gifts of small value. In my view, predominant business reasons for the application or supply of business assets free of charge should not be subject to VAT. This is also based on the principle of neutrality, that requires transactions of a sufficiently similar nature to be treated the same from a VAT perspective.