It is important that contracts / grants are designed and entered into in a way that ensures the individual educational institution against involuntarily ending up in a situation where VAT reduces the expected income.
For the Tax recipients
If the recipient of the delivery does not have the right to deduct the VAT, for example funds and associations, a grant or a subsidy will often have to include the VAT. If this has not been included in the project planning, the educational institution may risk having to settle VAT on the grant and will thus lack 20% of the funding for the project. For calculating sales tax calculator zip code this is essential now.
In order to determine whether a subsidy is subject to VAT, it is necessary to assess whether there is a “supply for consideration”. This applies both in a two-party situation (grantor and educational institution) and in a three-party situation (grant recipient, grantor and third party to whom the benefit is provided). If there is a delivery for consideration, the service is subject to VAT.
The following argue that the service is subject to VAT:
- A direct link between subsidy and consideration.
- The grant is given in the interest of the grantor, and the grantor benefits from the grant.
- The grantor is entitled to the delivery of a specific service / task.
The following argue that the service is not subject to VAT:
- Grant / grantor is not entitled to a consideration.
- The subsidy is of a general nature without specific requirements.
- The purpose for which the grant is given is prompted by the grant recipient.
- It will always be a concrete assessment whether VAT should be imposed or not. But it is important that the considerations about VAT are included already at the beginning of the project phase.
We often experience situations where there is doubt about the VAT handling in projects, and especially in collaborative projects where internal between the project participants is settled on the basis of effort or costs.
In grant situations where several parties receive a share in a grant without consideration, the VAT liability depends on whether the individual institution is included as a grant recipient or as a subcontractor. If the institution is included as a co-grant recipient – most often it is a requirement that all grant recipients are mentioned (directly) in the grant / application – the distribution between the grant recipients, according to a “cashier principle”, without VAT. If the institution does not appear in the grant, the institution is to be regarded as a subcontractor.
- The services of a subcontractor are generally subject to VAT. Therefore, a subcontractor must calculate sales VAT on its services to the other project participants, unless the service itself is specifically VAT-exempt under the VAT Act, such as VAT-exempt tuition.
- If the grant recipient who receives the subcontract in this situation is not entitled to a VAT deduction / VAT refund, the VAT on the subcontract will be an expense in the project. It often happens that the grant recipient is not entitled to a VAT deduction or VAT refund in projects.
The above exemplifies the importance of role distribution. A division of roles in the individual institutions should be assessed as early as possible and always before the grant application / contract signing. The partners in the above can be other educational institutions, but it can also be private actors where a co-financed project is entered into.