NPOs regularly receive grants from national or European public authorities. The latter intend to finance activities deemed to be in the public interest, and the recipient of the subsidies is responsible for justifying the use of the funds received and for monitoring their use.
Obtaining subsidies will essentially raise two questions in regards to VAT:
- Should the grant be subject to VAT?
- Does the grant influence the association's right to deduct VAT?
Should the grant be subject to VAT?
There are four categories of grants:
Grants directly linked to the price of a good or service
These are subsidies allocated by the public authorities and which most often appear as an addition to the price of a good sold or a service provided by the said organisation.
These subsidies are subject to VAT.
Example: sums granted by a public authority for products which are not profitable to sell at market price. This subsidy is a direct compensation for a fixed selling price. The amount of the subsidy is usually determined according to the selling price and quantity of the products sold and directly benefits the buyer of the good, who thus pays a lower price thanks to the subsidy.
These are subsidies which are generally allocated by the public authorities in order, for example, to cover part of the operating costs or to make up for all or part of the imbalance between the income and expenditure of an organisation.
These subsidies are not subject to VAT.
Examples include public investment grants, contributions to overheads or running costs (staff costs, etc.).
These are sums allocated to a body by the public authorities as a subsidy but which are in fact the price paid by the authority to obtain the agreed service or good.
These sums are subject to VAT.
Example: a public authority pays a sum to a body to acquire a good or service for itself.
These are sums allocated to a body by the European authorities which may fall into one of the three categories mentioned above.
These sums may or may not be subject to VAT.
Example: the implementation of a project within the framework of a European programme.
Does the grant influence the association's right to deduct VAT?
In principle, the payment of operating grants does not affect the right to deduct of the taxable person who receives them, except in certain specific situations where the grants must be included in the denominator of the deduction pro rata of a taxable person with a partial right to deduct.
Keep in mind
There are many types of financial assistance granted by various public authorities - subsidies, grants, premiums, State intervention, allowances, endowments, etc. - and they represent a very large financial amount and reach almost all sectors of activity.
However, even if the granting of subsidies is a common practice, the tax consequences of this practice, particularly in terms of VAT, remain largely unknown.
It is in an association's best interest to have a good grasp of the VAT implications of the subsidies it receives. Indeed, tax authorities know the issue well and will either subject the amount of the grant to VAT (which will reduce the amount that can actually be used by the association) or limit the right to deduct VAT on the costs related to the activity covered by the subsidy.