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ARTICLE 6.5 — Ineligible costs

Legal text: 
Annotation: 

1. Ineligible costs

Costs are ineligible, if one of the following applies:

-         they do not meet the general and specific eligibility conditions set out in Articles 6.1 to 6.4

Examples: additional remuneration (‘bonuses’) paid by for-profit or non-profit entities do not fulfil the conditions set out in Article 6.2; subcontracting costs do not comply with Article 13

-         they are listed in Article 6.5, in particular:

-         costs related to return on capital or return generated by an investment

Examples: dividends paid as remuneration for investing in the action; remuneration paid as a share in the company’s equity.

-         debt and debt service charges

‘Debt service’ is the amount paid on a loan in principal and interest, over a period of time.

Example: If a beneficiary takes a loan used to acquire equipment or consumables for the project of EUR 100 000 at 9 percent interest for 10 years, the debt service for the first year (principal and interest) is EUR 15 582

-         provisions for future losses or debts

‘Provision’ means an amount set aside in an organisation’s accounts, to cover for a known liability of uncertain timing or amount. This includes allowances for doubtful or bad debts.

-         interest owed (i.e. interest on a loan to borrow capital)

-         excessive or reckless expenditure

‘Excessive’ means paying significantly more for products, services or personnel than the prevailing market rates or the usual practices of the beneficiary (and thus resulting in an avoidable financial loss to the action).

‘Reckless’ means failing to exercise care in the selection of products, services or personnel (and thus resulting in an avoidable financial loss to the action).

-         currency exchange losses (i.e. for beneficiaries using currencies other than euros or being invoiced in a currency other than the currency they use: any loss due to exchange rate fluctuations (e.g. between the date of invoicing and the date of payment))

-         bank costs charged by the beneficiary’s bank for transfers from the Commission/Agency.

Conversely, bank charges for the distribution of the EU funding may constitute an eligible cost for the coordinator (if the eligibility conditions of Article 6.1 and Article 6.2.D.3 are met).

-         deductible VAT

‘Deductible VAT’ means VAT that is recoverable under the national ‘VAT system’ (i.e. the system of collection and deduction under the national VAT legislation). Such VAT is not a genuine and definitive cost and, according to accounting standards, should not be recorded as such. Therefore, it is not actually incurred by the beneficiary.

The cost and revenue accounts should exclude deductible VAT; such VAT should be recorded in separate payable or receivable accounts, without effect on revenue or cost line items.

The VAT paid is a claim against the tax authority. It should be recorded in the ‘assets’ part of the balance sheet. It should not be recorded as expenditure in the profit and loss accounts (only the purchase price of goods and services excluding VAT should be recorded). Similarly, for the value of purchased equipment or assets, only the net purchase cost should be recorded in the balance sheet’s fixed asset line, and the depreciation cost should be calculated based on this value, excluding VAT.

The VAT collected is a debt towards the tax authority and should therefore be recorded in the ‘liabilities’ part of the balance sheet.

Conversely, if VAT is NOT deductible, it is an eligible cost.

The full price of the goods or services bought by the beneficiary can be recorded as expenditure in its profit and loss accounts, without any distinction between the net price and the amount of VAT charged on it. The full price of equipment and assets bought can be recorded in the balance sheet’s fixed asset line and is the basis for the depreciation allowances recorded in the profit and loss accounts.

-         costs incurred during the suspension of the implementation of the action

Example: Action is suspended and one of the beneficiaries continues working on it after the date of the suspension

-         costs declared under another EU or Euratom grant (i.e. double funding)

This includes:

-         costs funded directly by EU programmes managed by the Commission or Executive Agencies (e.g. other H2020 grants)

-         costs managed/funded/awarded by Member States but co-funded with EU/Euratom funds (e.g. European Structural and Investment Funds (ESIF))

-         costs for grants awarded/funded/managed by other EU, international or national bodies and co-funded with EU/Euratom funds (e.g. Joint Undertakings, Article 185 TFEU bodies)

-         if a beneficiary is receiving an operating grant[1] from the EU/Euratom, then the indirect costs of that beneficiary are not eligible and the 25% flat-rate should not be applied — unless it can demonstrate that the operating grant does not cover any costs of the action (see Article 6.2.E).

Examples (operating grants): Grants awarded to support the running costs of certain institutions pursuing an aim of European interest, such as: College of Europe, European standards bodies (CEN, CENELEC, ETSI).

-         cost categories explicitly excluded in the work programme/call (if option applies).

If a beneficiary declares ineligible costs, they will be rejected and, if needed, other measures specified in Chapter 6 (e.g. suspension, termination, grant reduction, etc.) may be taken.

 

Specific cases (ineligible costs):

Non-identifiable VAT (in foreign invoices) — In exceptional cases where the beneficiary cannot identify the VAT charged by the supplier (e.g. small non-EU invoices), the full purchase price can be recorded in the accounts if it is not possible to deduct the VAT. That VAT would therefore be eligible.

Partially deductible VAT — Some entities have a mixed VAT regime, meaning that they carry out VAT exempt or out-of-the-scope activities AND VAT taxed activities. When VAT paid on goods or services by these entities cannot be directly allocated to one or the other category of activities it will be partially deductible. Therefore it will also be partially eligible. The eligible part corresponds to the pro-rata of the VAT which is not deductible for that entity.

In these cases, the beneficiary uses a provisional (estimated) deduction ratio during the year. The final ratio is only determined at the end of the fiscal year. The beneficiary must regularise VAT when closing its accounts. Therefore, the beneficiary must also regularize the VAT costs declared for the grant (by declaring, in the next reporting period, an adjustment for the difference between the provisional deduction ratio and the final ratio).

Duties — The eligibility of duties depends on the eligibility of the cost item to which they are linked (i.e. in whose price they are included). If the item is eligible, the duty is also eligible.


[1]     For the definition, see Article 121(1)(b) of the Financial Regulation No 966/2012:operating grant’ means direct financial contribution, by way of donation, from the budget in order to finance the functioning of a body which pursues an aim of general EU interest or has an objective forming part of and supporting an EU policy.