VAT and goods donated to a taxable business

The CJEU has held that there is no exception to the deemed supply rules in the case of the donation of goods by a business to another taxable business: Tax Offic e X v Y KG (Case C-207/23). Despite the fact that any VAT charged on a supply of those goods to the donee business would have been recoverable, the CJEU declined the invitation to apply a purposive construction to Article 16 of the Principal VAT Directive and considered that the donor was required to account for output VAT on the deemed supply.

Background

The taxpayer, Y, operates a biogas plant in Germany for the production of biogas from biomass. This biogas was used for electricity and heat production. Most of the electricity was sold back into the general electricity grid and part of the heat was used for Y’s production process. However, Y made the majority of its heat available free of charge to two local businesses which used it for the drying of wood and for heating asparagus fields.

Article 15 of the Principal VAT Directive treats heat, along with electricity and similar objects, as tangible goods for VAT purposes. Since Y did not charge a fee for this heat, the tax authorities regarded the supply of heat as falling within the deemed supply rules for in Article 16 for goods removed from a business for private use, use of staff, as a gratuitous gift or otherwise for non-business purposes.

Y contested that ruling and also contested the valuation of its deemed supply (if it failed on the first point). In particular, it argued that the tax authority was not entitled to calculate the “cost” of the heat as including not only the direct production costs of the heat but also indirect elements, such as Y’s financing costs.

CJEU decision

Y argued that the purpose of Article 16 was clearly to prevent a business obtaining a VAT advantage by obtaining goods or services and deducting VAT on that purchase whilst then using those goods or services for non-business purposes (such as private use, private use by employees etc). In this case, there was no VAT advantage obtained as the heat had been used by two taxable businesses. Accordingly, Article 16 should be read as subject to a proviso that it does not apply where the recipient of the free goods is a taxable person who would be able to recover any input VAT on the supply.

The CJEU has rejected that argument. There is already a proviso to Article 16 for low-value gifts and samples and it makes no distinction according to the tax status of the recipient of the supply. In addition, the CJEU noted that accepting Y’s argument could give rise to practical difficulties in applying the deemed supply rules by requiring the person providing the free goods to verify the status of the recipient.

On the question of the valuation of the deemed supply, the CJEU had held that in determining the cost price of the goods (where there is no purchase price or market price available) account needs to be taken not only of the direct costs of production but also costs that are indirectly attributable, such as financing costs.

Comment

It is hard not to feel sympathy for the taxpayer in this case, forced to account for VAT on the donation of goods to another taxable business. In principle, simply charging a small, nominal fee (with VAT) for the heat would have avoided the cost where that VAT could be recovered by the recipient business.

It is also perhaps slightly surprising that the CJEU were not able to take a purposive approach to the provision, much in the way that the Court has read conditions into Article 203 to alleviate the requirement to pay VAT shown on an invoice where the supply is to a final consumer (see our earlier Article). It is not clear that the requirement on a business to show that the goods were donated to a taxable business would be particularly onerous, and certainly not more onerous than the requirement to show that the recipients of invoices were all final consumers.

However, in most cases it may be possible to avoid the scenario faced by the unfortunate taxpayer in this case by simply charging a nominal fee for the goods (with VAT) so as to ensure the deemed supply rules do not apply.