6.3.3.6 Taxation of the ‘private use’ of services.

For taxation of the private use of services, not being the use of business assets, the relevant provision reads as follows (underlining by me, JB):

In my view the system of (in principle: full) VAT deduction followed by taxation of the private use also applies to services. This view is mainly based on the same grounds as I used above for arguing that these rules apply to any type of goods. Services for which it is impossible to establish the amount or extend of the private use at the time that the VAT on the purchase of these services can be deducted, should be treated the same way as the goods described above. As an example, I take a company lease car. A company leases cars under an operational lease scheme (which is considered a service similar to hiring the cars) and puts the cars at the disposal of some of its employees free of charge. These employees are allowed to use the car for private purposes. The actual private use can only properly1 be taxed under a system of full deduction followed by an adjustment of that deduction for private use, either by taxing the private use or by retroactively disallowing (adjusting) the deduction. The first adjustment system is, in my view, covered by the relevant provision in the EU VAT Directive. The current EU VAT rules do not provide for the application of the second system in case of private use.

The adjustment provision for services not being the use of business assets does not contain the rule that it only applies ‘where VAT (…) was wholly or partly deductible’, which is included in the provisions regarding the application or use of business goods. I was unable to find an explanation of the absence of this condition in any of the official documents concerning the proposals for any of the EU VAT directives or adjustments thereof. In my view, however, the absence of this requirement is not an indication that the provision should not apply to bought-in services (as some people think, see below), but rather that the aim or goal of the provision is more than only an adjustment of the VAT that was previously deducted. The aim is, rather, 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.2

The relevant provision refers principally to services supplied by staff, and staff costs (in the form of salary) do not bear VAT. However, where a single, composite supply should be classified as a supply a service, the goods used will normally have been subject to VAT. And the taxable amount, for all supplies referred to in the relevant provision, is ‘the full cost to the taxable person of providing those services’.3

An example derived from the opinion of Advocate General to the CJEU Sharpston in the Danfoss and AstraZeneca-case4 would be the extension of the home of a building contractor’s home, using some of his employees and materials from his stockyard. Input VAT will already have been deducted on the materials used, but output tax must now be levied on that same cost, together with the cost of providing the labour, in order to place the contractor in (almost) the same position, vis-à-vis VAT, as a private individual obtaining the same goods and services. However, if the VAT on the materials would not have been deducted, e.g. because they were sourced from a private individual, VAT should be levied on these materials as part of the service as well, because if the contractor would have purchased exactly the same service, consisting of exactly the same components, VAT would have been due on the entire supply (including all its components) as well.

Not everyone agrees with that latter view. According to Advocate General Sharpston in the Danfoss and AstraZeneca-case, 5 including the cost of supplies on which input tax was not deductible in the taxable amount would run counter not only to the scheme of Articles 16 and 26 of the EU VAT Directive as a whole but also to the fundamental principle of neutrality of VAT for taxable persons. Consequently, taxation under Article 16 or 26 of the Sixth Directive is conditional not only on classifying the supply as an application for private use, but also on the deductibility of any VAT borne by cost components. Therefore, according to Sharpston, any components that bear non-deducted VAT should not be taxed as a result of these provisions (insofar as the VAT was not deducted). As mentioned, I disagree. The purpose of the relevant provisions is to ensure equal treatment of this business and a private consumer that would have to purchase the same service from a third party. A third party would also have charged VAT on the components that he purchased without being able to deduct VAT.6 This would be different if the taxable person would first withdraw the goods from his business, because that would remain untaxed, and then would use those non-business assets as elements in the total supply.7

Below I have included an example of supplies of goods and a supply of services provided without consideration for private purposes. With these examples I demonstrate that, from a point of fiscal neutrality,8 taxing the ‘elements’ of a total supply on which no VAT was deducted may lead to (slightly) unequal situations.

The above demonstrates that the purpose of the provisions that treat certain supplies that are made for free as supplies that are made for consideration, which is equal treatment of a taxable person making free private use of supplies by his business, and the same supplies purchased by a private individual. Ensuring an even more equal treatment would require a change in the EU VAT rules, for example by using the ‘open market value’ as the taxable amount for the transactions that are deemed to be made for consideration. Assuming that a private individual would also pay the open market value, this would ensure equal treatment. Be that as it may, and keeping in mind that, according to the CJEU, the mentioned ‘equal treatment’ is the purpose of the relevant provisions, it should also be borne in mind that in the explanatory notes to these provisions it was mentioned that ‘the same could have been achieved by disallowing VAT deduction’.15

This raises questions about the purpose of the relevant provisions. In my view, given the fact that the EU VAT is a taxation of expenditure for private consumption, and given the fact that the CJEU has repeatedly decided that these provisions are intended to ensure treatment as between a taxable person who applies goods or services for his own private use or for that of his staff and a final consumer who acquires goods or services of the same type,16 which is a reflection of the principle of neutrality, I would argue that the provisions should also ensure the taxation of elements that would have been subject to VAT if purchased as a private individual.