Transitional restrictions on the right to deduct EU VAT

Restrictions on the right to deduct input VAT are costly features of the VAT system and, for that reason, draw the attention of businesses. The current VAT Directive provides that the Council must determine the expenditure in respect of which VAT is not deductible and adds that VAT is under no circumstances deductible in respect of expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment. This article briefly examines the scope of the exclusions from the right to deduct input VAT, the legal history of that provision, its interpretation by the European Court of Justice (ECJ) and the issues pending before the ECJ.