In C-249/17 Ryanair, the CJEU dealt with a dispute concerning the deduction of input tax paid with respect to expenses that were made with a view to generating future income – which ultimately never materialized.
The European Court of Justice in 2018 handed down a judgment in C-20149/17 Ryanair according to which a taxable person may deduct input tax on performances which they received and based upon which they intend to generate income (and thus pay tax) in the future – even if those revenues from selling taxable goods and supplies eventually fail to materialize.
The business in question does have to demonstrate that the expenses in question were directly and immediately related to its overall economic activity and therefore a part of the general (overhead) expenses towards that activity.
The CJEU held that the rationale behind the VAT recovery system as per the EU Directive is to avoid imposing any unnecessary burden on taxpayers. The common VAT system is also expected to ensure the neutrality of taxation of all economic activities, whatever their purpose or results, provided that they are themselves subject to VAT.
In other words, the principle of tax neutrality requires that the first investment expenditure which was made for the purpose of commencing a business qualifies as an economic activity. If it were otherwise, i.e., if the economic activity were to be considered commenced only when taxable income arises, this would violate the neutrality principle which must be upheld even if the right to deduct, once it has arisen, eventually does not lead to the intended economic activity and thus to taxable transactions.
Judgment C-249/17 Ryanair
Council Directive 2006/112/EC on the common system of value added tax