VAT Compensation for EU-Funded Projects 7 July 2009
NDA envisages compensating higher VAT rates - as cost-increasing factors arising for reasons beyond the scope of competency of project hosts - that entered into force on 1 July. Through such means, the Agency helps avoid projects with high value planned procurements or services being exposed to threats. A similar type of compensation was granted earlier. Pursuant to the proposal made by NDA, the Government approved a proposal in May 2009 to counterbalance the impacts ensuing from the significant weakening of the Hungarian Forint; a decision has now been made to compensate higher VAT rates.
The mid-year VAT increase also affects funding granted and projects financed by the European Union that have already contracted within the framework of NHDP. This tax rise may, in certain cases, delay or make it difficult to launch projects. NDA envisages using the resources made available in a way that does not jeopardize procurements or services with non-deductible and un-reclaimable expenditures (VAT) for project hosts and ensures that projects negatively affected by the recent tax rises are implemented with their original content and up to the scheduled deadline date.
VAT increase negatively impacts all project hosts not authorised to legally deduct VAT for expenditures incurred within the framework of either the whole or a part of the project. VAT increase may, although to different degrees, affect each individual operational programme, since higher VAT rates charged equally affect equipment procurements and services. The compensation procedure primarily focuses on projects in which case applications have already been submitted, project hosts are not or only partially entitled to deduct VAT and VAT increase effectively increases costs by a minimum 2%, or at least 5 million HUF. The principle of co-financing and risk-sharing (the applicant must provide the proportionate amount of own funds) must also be enforced in respect of surplus expenditures arising due to VAT increase; moreover, only certifiable and surplus expenditures realized may constitute the basis for compensation.
The key component of the rules of procedure is that project hosts also attach a project budget listing costs earmarked for planned procurements and services when submitting their applications. If the project host is not VAT registered, or is not or only partially authorised to deduct VAT or calculates non-deductible and deductible VAT by mean of scaling, they are entitled to plan procurements by including VAT; therefore, in this case VAT can be claimed against the funding granted in proportion to the funding intensity.
The applicant is responsible for presenting and justifying the extent of the impacts of VAT increase. The way in which the project host must do everything possible to avoid or reduce surplus expenditures is still considered an expectation. Project hosts are able to contribute to the efficient use of resources made available by regrouping funding, making savings, reducing expenditures or locating alternative procurement resources. However, it is also necessary to note that mid-year tax changes may even make savings for projects, due to, for example, the decrease in the rate of employee tax contribution.
The Agency also envisages ensuring the possibility to claim non-deductible VAT in the case of calls to be announced in the future. Regrouping, as well as planning a reserve for unforeseeable expenditures is still possible on the grounds of savings made in the project budget.