No Payment, No VAT? Not Quite — How Free Supplies and the “Consideration” Test Really Work

• Consideration is the trigger, but not the whole story. Under Article 2(1) of the EU VAT Directive, VAT applies to supplies of goods or services made for consideration — meaning there must be a “direct link” between what is supplied and what is received in return; where nothing of value flows back, there is generally no taxable supply. [vatupdate.com], [taxation-c….europa.eu]
• “Free” is not automatically outside VAT. To stop goods and services being consumed VAT-free, the Directive deems certain no-consideration transactions to be taxable supplies — most importantly Article 16 (goods disposed of free of charge) and Article 26 (services and private use) — but only where input VAT was originally deducted. [grantthornton.nl], [gov.uk]
• Recent CJEU case law keeps sharpening the edges. Rulings such as Deco Proteste (C-505/22) on promotional gifts and Y KG (C-207/23) on free-of-charge heat show that the classification hinges on the facts: an ancillary gift can be absorbed into the main supply, while a genuine gratuitous disposal can attract output VAT even when the recipient is itself a taxable business. [grantthornton.nl], [simmons-simmons.com]

Article

One of VAT’s foundational principles sounds deceptively simple: if nobody pays for something, there is nothing to tax. In reality, the treatment of goods and services provided without payment is one of the more nuanced corners of the system — and one where businesses regularly get caught out. [vatupdate.com]

The starting point: supply “for consideration”

The EU VAT Directive (2006/112/EC) subjects to VAT only those supplies of goods and services that are “effected for consideration” by a taxable person acting as such (Article 2(1)). “Consideration” is interpreted broadly by the Court of Justice — it is everything the supplier receives in return, and need not be money. A barter, for example, comprises two taxable supplies, each leg serving as consideration for the other, and third-party payments can equally qualify. [vatupdate.com]

The decisive test is the“direct link”: there must be a legal relationship in which the supply and the payment are reciprocal, with the price reflecting the value of the benefit provided. Where that link is absent — no value flows back to the supplier — there is, as a rule, no supply within the scope of VAT. [vatupdate.com], [taxation-c….europa.eu]

Why “free” can still be taxable: deemed supplies

If the analysis stopped there, a business could buy goods, deduct the input VAT, then give them away and leave the final consumer enjoying them entirely tax-free. To prevent exactly this leakage, the Directive contains anti-avoidance “deeming” provisions that treat certain no-consideration transactions as taxable supplies made for consideration: [gov.uk]

• Article 16 treats the disposal of business goods free of charge — or their application for non-business purposes — as a supply of goods, provided VAT on those goods (or their components) was deductible. [grantthornton.nl]
• Article 26 performs the equivalent function for services, including the private use of business assets and services rendered free of charge for non-business purposes. [taxation-c….europa.eu]

The logic is consumption-based: VAT is a tax on final consumption, so the deeming rules claw back the tax that would otherwise escape when previously-deducted goods leave the taxable sphere without a charge. National systems mirror this — the UK, for instance, deems the permanent transfer of business assets, the temporary non-business use of assets, and self-supplies to be supplies precisely “to prevent the goods or services being enjoyed tax-free by the final consumer.” [gov.uk]

The exceptions that soften the rule

The deeming provisions are not absolute. Article 16 itself carves out low-value gifts and samples, which do not trigger an output charge. Member States apply their own de minimis thresholds — in the Netherlands, for example, samples with a cost price up to roughly EUR 15 fall outside a taxable supply, offering a practical planning route for promotional activity. [bdo.nl]

What the CJEU case law shows

Two recent rulings illustrate how fact-sensitive the boundary is:

• Promotional gifts absorbed into the main supply — Deco Proteste (C-505/22). A Portuguese magazine publisher gave new subscribers a welcome gift (a tablet or smartphone worth under EUR 50). The tax authority argued this was a separate free supply under Article 16. The CJEU disagreed: the gift was ancillary to, and absorbed by, the subscription — it was designed to attract subscribers and did not constitute an independent supply, so VAT was correctly accounted for only on the subscription fee. [grantthornton.nl], [bdo.nl]
• Genuine gratuitous disposals stay taxable — Y KG (C-207/23). A German biogas producer, having fully recovered input VAT on its plant, supplied heat free of charge to neighbouring businesses. The CJEU held that Article 16 still applied and output VAT was due on the deemed supply — declining to read in an exception simply because the recipient was itself a taxable person who could have recovered the VAT. The Court reasoned that the only existing proviso is for low-value gifts and samples, and it draws no distinction based on the recipient’s tax status. [grantthornton.nl], [simmons-simmons.com]

Practical takeaways for businesses

• Test for the direct link first. If there is genuinely no reciprocal benefit, the transaction may fall outside VAT entirely — but document the analysis carefully. [vatupdate.com]
• Watch the input-VAT trigger. The deemed-supply charge under Article 16/26 generally bites only where input VAT was deducted; if it was not, the deeming provisions typically do not apply. [grantthornton.nl]
• Distinguish “ancillary” from “free.” A giveaway tied to a paid supply may be absorbed into that supply (following Deco Proteste), whereas a standalone gratuitous transfer may attract output VAT (following Y KG). The facts — and the marketing structure — are decisive. [grantthornton.nl], [simmons-simmons.com]
• Use the low-value reliefs. Samples and low-value gifts within national thresholds can be provided without an output charge. [bdo.nl]

The bottom line

“No payment” is a useful first instinct, but a dangerous conclusion. In EU VAT, the absence of consideration removes a transaction from the ordinary scope of the tax — yet the deemed-supply rules exist precisely to catch value that would otherwise slip out untaxed. Getting the classification right means asking two questions in sequence: was there consideration and a direct link? and, if not, do the deeming provisions nonetheless apply? [vatupdate.com], [grantthornton.nl]

External links

• VAT Concepts Explained: “Consideration” and Direct Link (VATupdate) [vatupdate.com]
• ECJ explains how VAT applies on free-of-charge supplies (Grant Thornton) [grantthornton.nl]
• Is VAT due when goods or services are provided free of charge? (Grant Thornton) [grantthornton.nl]
• VAT treatment of goods or services provided free of charge (BDO) [bdo.nl]
• VAT and goods donated to a taxable business — Y KG (Simmons & Simmons) [simmons-simmons.com]
• Taxable transactions — EU VAT Directive (European Commission) [taxation-c….europa.eu]
• Supply for no consideration — VATSC02130 (HMRC / GOV.UK) [gov.uk]