Worth remembering
Does your company sponsor cultural, sporting or recreational events?
In the event of a VAT audit, the tax administration could very well reject the VAT on this expenditure if it considers that the price paid is too high or that the expenditure is unnecessary. The lack of economic rationality would thus prevent the exercise of the right to deduct VAT.
Is this moral stance in line with the VAT Directive or, on the contrary, is it completely at odds with it?
This is the question put to the Court of Justice.
The case before the Court of Justice
A paper manufacturer sponsors a motor race in Hungary. The sponsorship consists of the affixing of stickers, bearing the company's name, on cars. It deducts VAT on these advertising services in its VAT return.
The tax authorities do not see it that way and reject the deduction. The reason given is clear and precise: the commercial decisions of a paper manufacturer's customers are not likely to be influenced by stickers on racing cars. The expense is therefore neither reasonable (it was paid too much) nor economically viable.
The lack of economic rationality is an obstacle to the exercise of the right of deduction of VAT.
What does the Court of Justice say?
So what is ultimately unreasonable: the advertising expenditure incurred by the company or the rejection of the deduction of VAT on that expenditure by the tax authorities?
The Court has just decided the question in favour of the company and at the same time reminded the tax authorities of some basic VAT principles (judgment of 25/11/2021, Amper Metal Kft, case C-334/20):
- The price, between two independent parties, is a subjective concept in VAT. The tax administration must accept this price even if it considers it unreasonable.
- The deduction of VAT on an expense is not subject to a criterion of economic profitability. It is a fundamental right inherent in the common VAT system and must be guaranteed regardless of the results of the activity.
What does this ruling mean?
Does your company sponsor cultural, sporting or recreational events?
The tax authorities will tend to consider that these are entertainment expenses without a strictly professional character if they consider that the price paid for this sponsorship is excessive. The same will probably be true if they do not see the usefulness of the expenditure, particularly in view of the nature of your clientele.
You will then have to try to make them see reason. VAT on a business expense is still deductible for a business even if the expense is neither reasonable nor economically viable.
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