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Multiform VAT status for Association
What characterizes the world of non-profit associations is the multiform nature of their VAT status : ordinary taxable person, VAT exempted, mixed or even partial taxable person, etc.
In order to determine the correct VAT status of your association, you will have to correctly qualify its economic activities. There are 3 possibilities in this respect:
- Activities subject to VAT
- Activities exempt from VAT
- Activities outside the scope of VAT
Activities subject to VAT
Non-profit association do not enjoy a specific status as far as VAT is concerned (contrarily to the income tax system). In principle their activities are subjected to VAT (general principle of taxation). Therefore, they must register for VAT purposes and are subsequently entitled to deduct the VAT borne on the costs relating to their taxed activities.
Let's take an example
An organization performing, under consideration, individual services to its members (ex: providing a specific study) exercises to that extent an activity subjected to VAT.
However, there are two exceptions to this general principle of taxation: activities VAT exempted and activities out of the scope of VAT.
Activities exempted from VAT
Some activities (specifically listed in the VAT legislation) are exempted from VAT.
This is particularly true for activities in the following fields: medical, sports, education, lobbying, museums, concerts and shows, etc.
The Association performing exclusively those activities do not have to register for VAT and cannot subsequently deduct the VAT borne on the costs relating to the exempted activities.
Let's take an example
An organization esablished in Belgium which, without seeking profit and in return for a subscription from its members, carries out the representation and defense of the collective interests of its members (lobbying), performs to that extent an activity exempted from VAT under art. 44, §2, 11° of the Belgian VAT Code. Hence, the organization does not have to invoice VAT to its members and does not have the subsequent right to deduct VAT on its costs relating to this exempted activity.
Activities outside the scope of VAT
There are also activities considered of general interest (to the public at large) which are outside the scope of VAT. The (international) NPO’s performing such activities are not, under certain conditions, considered as VAT-able person and can therefore not deduct the VAT borne on the costs relating to those “outside the scope” activities.
Let's take an example
The realizing by an organization of a study ordered and fully subsidized by a public body and which will freely be put at the disposal of a large public is an operation in principle outside the scope of the VAT. The organization does not have the status of a taxable person for this specific operation and is therefore not entitled to deduct VAT on the costs relating to this activity.
When does the conflict between the association and the tax authorities arise?
Usually, it is a misreading of the VAT status at the time the association is set up that is the trigger that will set the wheels in motion a few years later. By not checking the VAT status or by having a truncated analysis of this status, some associations expose themselves without even knowing it to a major VAT risk. The VAT consequences are in fact completely different depending on whether the association has the VAT status of an ordinary taxable person, an exempt, mixed or even partial taxable person.
And it is at the very moment when the tax authorities announce a VAT control that the file will go off track with possible tax adjustments over 3 years, administrative sanctions and interests for late payment.
The expert's eye
The correct determination of a VAT status of an Association is crucial in two ways :
- A correct determination of the VAT status allows to consider the extent of the deduction right; i.e. the VAT percentage the organization can deduct on the costs she bears for its activities.
- A correct determination of the VAT status also allows to take the potentially necessary steps in order to prevent “bad surprises” during a potential administrative VAT audit. Nowadays, the NPO’s are indeed more and more audited by the fiscal authorities.
The correct determination of the VAT status of an association cannot be improvised. A professional and methodical approach to VAT is essential to clarify the VAT status because it depends on several parameters that are specific to each association.
Therefore, getting advice on such a complex matter can sometimes help to avoid many setbacks.
VAT errors, even if made in good faith, can put the association's finances in serious danger. In that scenario, the association's director or accountant (internal or external) could be held liable.