Can the organizer of a free event deduct VAT?
The logic of VAT is that at the end of the economic story the tax is paid by the final consumer. When a purchased good is not re-supplied with VAT or a received service is not used for an economic activity, the VAT is not deductible.
Link between the activity and VAT
VAT which directly or indirectly linked with your economic activity, is deductible. If you e.g. sell shoes, the VAT paid on the purchase of the shoes is clearly deductible. But also the VAT paid on the accountant's invoice, the electricity bill, etc. is deductible. Notwithstanding you do not actually sell these services, they are necessary for your economic activity. In order to deduct VAT, there should be a direct link with your VAT activity.
A free event
What happens if you (co-)organize an event with free access?
With respect to an open house day there is quite some certainty. The so-called 'reception costs' do not give right to VAT deduction since they are deemed not to have a professional nature. Examples in this respect are flowers on the reception desk, but also drinks and snacks offered to visitors.
But in case these reception expenses can be considered as publicity (rather than creating a 'pleasant ambience for the visitor'), the VAT is deductible. When your event is intended to attract new customers or to realize direct sales, the VAT is deductible.
Watch out: for direct tax purposes, the discussion is not fully cleared yet.
But it can also be a village fair or an event in the local festivity hall. Probably you will not charge an entrance fee for the event itself. You will finance the event through the sale of vouchers for drinks and snacks and advertising space.
Subsequently you book an artist, you rent a bouncy castle and mobile toilets.
Is VAT still deductible?
You create an activity with clear added value, i.e. through advertising and the sale of drinks and food. But the event itself is free. If you do not ask for payment to listen to the artist or to jump on the bouncy castle, you are as organizer the final consumer of these services and you cannot longer deduct the VAT. You could - in theory - become a mixed VAT payer where the VAT related to drinks, food and advertising space would be deductible, the VAT related to the artist, toilets and bouncy castle is not.
'Unity of services' might be the savior
When answering to a question regarding such village fairs the minister comes to the rescue by using the theory of the unity of services.
According to the minister the organizer is a VAT payer since he offers advertising and sells drinks and food. The other services which are offered without consideration are inextricably linked with the VAT activity. The minister compares this situation with a bar offering life music to entertain and attract clients. VAT on the expenses related to such performances is deductible according to the general rules.
The fact that visitors have free entrance and are not obliged to consume, does not take away the economic character of the activity. The minister compares this with shops and showrooms which are regularly visited by non-buying visitors. Finally, the minister remarks that this not only applies to the cultural sector, but can also be applied to sport events and sporting infrastructure.
Ratio between free and taxable
You should make sure that your free services are not more important for the economic activity for which you claim VAT deduction. This was experienced by a Liège not for profit organization. This organization organized a number of activities such as a Christmas village, food festival, ... for which VAT was fully deductible, since an entrance fee had to be paid or places were rented out. Every two years it also organized the film festival Imagesanté, a combination of film, health and science. This festival was free (except for the gala night).
For the tax authorities (followed by the court), the organization of the event does not fit with the economic activity of the not for profit organization. The event is free and it merely generates any income. The statement that this event provides the not for profit organization with more visibility and that the revenue allows it to pay its staff, is contradicted by the facts.
The court concludes that it is a free event and consequently the VAT is not deductible in the hands of the not for profit organization. As a result, it loses more than 40.000 euro of VAT. An expensive lesson.