The reimbursement of value-added tax (VAT), an important cost element in EU Cohesion spending, is prone to error and does not always represent the best use of EU funds, according to a rapid case review by the European Court of Auditors. The auditors consider that public bodies should no longer be reimbursed for the VAT related to Cohesion spending in the post-2020 period.
EU spending in Cohesion often involves subsidising the purchase of goods or services, and the VAT on such purchases can account for up to one fifth of a project’s total cost. As a general rule, VAT is only eligible for EU co-financing if it cannot be recovered under national legislation.
Having analysed data collected over a number of years, the auditors point out that the reimbursement of VAT is not only a frequent source of errors but may also lead to the sub-optimal use of EU funds. This particularly affects public bodies receiving EU support, such as national, regional and local government authorities.
The auditors highlight a number of cases which do not represent the best use of EU funds. For example, a Member State ministry may implement an infrastructure project and claim VAT as an eligible cost for reimbursement by the EU. At the same time, however, the Member State will receive the VAT revenue associated with the project via its tax collection system. The reimbursement will therefore overcompensate the actual expenditure incurred by the Member State.
“The EU reimbursement to a Member State may even exceed the actual cost of a project”, says Tony Murphy, the Member of the European Court of Auditors responsible for the rapid case review. “This is particularly relevant for large infrastructure projects with a high co-financing rate.”
In its proposal for the post-2020 Cohesion legislation, the European Commission suggests that VAT - whether recoverable or not - should be reimbursed for projects costing less than €5 million. Based on their review, the auditors maintain their previously expressed opinion that VAT should not be reimbursed to public bodies; they therefore suggest a reworking of the proposed legislation.