Over time, VAT has become a major tax for (international) associations or non-profit organizations. Not being able to deduct it represents a significant burden on the association's budget.
Therefore, many associations are looking for a legal way to recover all or part of the VAT on their expenses.
Can your association deduct VAT on its expenses? And if so, how much and how?
To find out, you need to be able to answer the following three questions:
Question 1: What is the association's VAT status?
Associations receive various kind of income: membership fees, organization of congresses, seminars, training courses etc., e-learning, studies, sponsoring, grants, donations, charity events, certification programs, etc.
As a rule, the activities carried out by an association are subject to VAT. However, there are two exceptions to this general principle of taxation: certain economic activities specifically listed in the VAT Code are exempt from tax (e.g. lobbying activities) while others remain outside the scope of VAT.
The exact qualification of the association's activities will be used to determine its category of tax liability (ordinary, mixed, partial, exempt or non-taxable) and therefore the extent of its deduction.
Question n° 2: What are the formal conditions to be met in order to deduct VAT?
The association can recover VAT in principle once a quarter by ticking the appropriate box in its VAT return. To avoid problems, it is essential to pay attention to the supplier invoices and the way they are reported in the VAT return:
- The supplier's invoices: is the association's VAT number mentioned? Is the good or service purchased sufficiently described? Very often the invoices are incomplete or inaccurate and the tax authorities will be happy to reject the VAT deduction in the event of a VAT audit.
- The VAT return: are the invoices entered in the correct boxes of the VAT return? Has the association correctly self-assessed the VAT on the invoices of its European and non-European service providers? The tax authorities apply a range of administrative sanctions when the VAT return is incorrect or incomplete.
Question n° 3: What if my association has to limit its right to deduct?
Where the association has the status of an ordinary taxable person, it can reclaim all the VAT on its expenses, unless a legal limitation on deduction applies (e.g. maximum deduction of 50% for expenses relating to private cars or no deduction for entertainment expenses, etc.).
Any other VAT status leads to a limitation of the deduction right. It is therefore necessary to determine the optimum method for calculating the deduction percentage:
- General pro rata
- Attributive system.
Each method has its advantages and disadvantages.
Our experience in the sector ? The more precise the accounting, the better it is possible to allocate the costs to a specific economic activity and thus optimize the association's deduction right.
By determining its exact VAT status and its optimal deduction method, the association can make significant savings.