This article by Anne-Sophie Snyers, Director of Finance, MCI Brussels first appeared in an issue of Headquarters magazine.
We all encounter Value Added Tax (VAT) in our day to day life and whenever we purchase something for personal use but it is surprising how many associations and organisations don’t choose to take advantage of the possible returns when organising an event in the EU.
VAT is a sales tax automatically charged on virtually all goods and services sold within the European countries and an increasing number of non-EU countries worldwide. VAT can add up to 25% to your bill but the average is around 20% in Europe. When organising a large event, VAT can therefore add a significant amount to your expenditure.
The good news is that it is possible to reclaim a large chunk of that figure, if you work with an experienced PCO with expertise in tax reclaim and who can take you through a difficult process across language barriers and countries. The European Commission revealed in 2004 that “80% of SMEs surveyed have in the past failed to apply for foreign VAT refunds due to the complexity of the process”* while a European legislation was adopted in the 1990s to allow companies to reclaim VAT on eligible overseas business expenditure.
Common reasons for the failure to reclaim VAT includes being unaware of the possibilities, language and location barriers and the long and complicated process that can bog down finance personnel.
The Legal Situation
The European Council Directive** on the common system of value added tax states that it is compulsory to charge VAT in the country where a supply of services relating to cultural, artistic, sporting, scientific, educational, entertainment or similar activities is held. Associations based outside the European Union context can have difficulties grasping the VAT concept on our shores, as sales tax for example in the United States cannot be reclaimed and is commonly much lower. Many US based organisations choose to work “under the radar” and ignore the legal obligation to charge VAT on registration fees, exhibition and sponsorship packages and other sources of income.
As an association, you are taking on a lot of risk if you choose to ignore European legislation, and as we’ve seen with likes of the Microsoft case, the EU is not afraid to levy serious fines on businesses which as a non profit association could be enough to cripple your organisation. Becoming legal in organising an event in Europe for a non European based organisation means to have legal representation in Europe as well as freezing a large amount of money in the country of the event as a guarantee to the local administration that they will pay what is due at the end of the event. A good PCO will avoid this by organising the event for your organisation under their name.
How VAT Works
Event Income = € 2,000
Event Expenses = € 1,000
Assume VAT percentage = 20%
|Event LEGAL (registration)||ILLEGAL (not registered)|
|Income received||€ 2,400 (2,000 x 20% VAT)||€ 2,000 no VAT applied|
|VAT paid||€ – 400||€ 0|
|Expenses||€ 1,200 (1,000 x 20% VAT)||€ 1,200 (1,000 x 20%)|
|Bottom Line||€ 800||€ 800|
|VAT declaration due to administration||Event LEGAL (registration)||ILLEGAL (not registered)|
|VAT from Registrations||€ 400||€ 0|
|VAT paid to Authorities||€ – 400||€ 0|
|VAT paid on Suppliers||€ 200||€ 200|
|Bottom Line||€ -200||€ -200|
The Event pays €200 of VAT on the supplier invoice AND can reclaim it in case the first scenario:
|Bottom Line||€ 800||€ 800|
|VAT reclaimed||€ 200||€ 0|
|TOTAL Bottom Line||€ 1,000||€ 800|
The process seems simple enough when shown as such but there can be a number of hurdles in getting that end result that associations will first need to cross.
The VAT Application and Reclaim Process
In order to charge VAT and to recover VAT on purchases, the PCO – under the name of the association – will have to register with the local administration to obtain a temporary VAT number that will identify the event (if the country is one used regularly it may be worth obtaining a permanent number). An experienced PCO will be able to contact the local fiscal authorities and produce a detailed “memo” or snapshot of the event that summarises the event for the government, this will contain primarily the budget and estimated revenues and expenses.
The PCO will then have to follow a strict criteria set by the local authorities to ensure all invoices issued are correct and all local invoices paid are correct. It is important to note that VAT is only reclaimable on suppliers that the event planner hires in the country of the event. For example, working with a French Audio Visual company in Spain will mean that the VAT will not be reclaimable on Audio Visual expense as the VAT will be paid to a different country, not the country where you have a VAT number and event registered.
The criteria as with the rate of VAT can vary from one country to another. For example in Czech Republic and Poland all invoices issued must be in dual language (Czech and Polish). It is imperative that all invoices issued contain the event’s local VAT number and all the invoices paid locally have the correct legal entity under which the PCO is registered. This can often be a time consuming process as it is necessary to ensure that the PCO doesn’t pay an invoice for a local service without 100% correct information.
The PCO will then be legally obliged to report each month to the local authorities on how much VAT is raised on the income and pay the corresponding amount. Following the financial closure of the event, the PCO will have to produce another “memo” of the event that details the final results and using an experienced PCO you can expect any VAT reclaim to arrive within 6 months to a year of that date.
It is always possible for an association to act independently of the PCO and go through the VAT application and reclaim process themselves, but with the time spent and difficulties an association can encounter working with many different regimes and countries, it is a better option to work with an experienced partner which will advise on every step of the way.
*European Commission, Tax survey 2004
**Article 52 of the European Council Directive 2006/112/EC of November 2006