If you are a grant funded organisation VAT can be a very confusing area especially as grants now commonly come with a range of conditions to be met akin to a contract. This can make determining if VAT is due on the funding quite difficult. However, it has generally been accepted that subsidies are outside the scope of VAT.
In the recent ECJ cases for C Gmbh & Co, KG and C-eg vi FInansamt both organisations were agricultural collectives that received subsidies to allow their members to purchase assets from the collective at a reduced price. The Co-Operatives purchased capital items from suppliers, recovered the VAT on the purchase as input VAT and then sold the assets to members at a discount of between 25% to 50% of the purchase price of the asset.
The discount was funded by a subsidy paid by an operational fund. The operational fund held money collected from members and grants. As well as paying the upfront purchase price subsidised by the fund the members paid a percentage of their income from goods sold that had been produced using the capital item. At the end of a set period the asset became the members own asset. The co-operatives treated the subsidies as outside the scope of VAT.
The ECJ determined that the full value of the supply of the assets by the co-operative to its members was the total amount the collective received – that is the subsidy plus the payment from the member. This mean that the subsidy was classed as further consideration for a supply to the members and made the subsidy payments within the scope of VAT.
The reason being that the funding arrangement meant that the subsidy provided to the member and used to offset the amount due on the supply of the capital items was clearly linked to the price of the item sold by the co-operative. This made it part of the consideration for the supply.
This case illustrates how difficult VAT can be for charities as subsidies allowing a charity to make a VATable supply can in some circumstances be classed as outside the scope of VAT. It is important to get VAT right as errors and penalties can be costly in a time where Charities and not for profit organisations face uncertainty due to the loss of grant funding from the Council of Europe. Therefore it is vital that Charities and grant funded organisations do not create needless exposures and costs.
If you are a charity, not for profit organisation or grant funded organisation or their accountant, The VAT People offer a range of solutions to assist you with managing you or your client’s VAT affairs. We can provide advice on specific transactions, grants and subsidies or can undertake a review of your organisation as a whole to identify if there are any VAT exposures or even missed VAT opportunities. Please call our free VAT helpline for an initial free of charge discussion of your needs.
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