Charities, beware the VAT pitfalls of Service Level Agreements

Are you in the not for profit sector? Do you enter into service level agreements in order to receive “grant “income?  If the answer to both these questions is yes then you need to read this.

Charities should be cautious when entering into contracts. Contracts are governed by contract law and there can be severe consequences for breach of contract. Charities need to understand the implications of entering such contracts and ensure that they are in their best interests .Charities also need to understand the indirect tax and direct tax treatment of such contracts so that they can protect their position as much as possible.

Many charities automatically assume that grant income is outside the scope of VAT. This is not necessarily the case. Where income is contractually due, the prescriptive terms of the contract may render the income to be liable to VAT as it is being received in return for a supply of services .If this issue isn’t considered at the time the contract is entered into, charities could run the risk of HMRC raising an assessment on income that they deem should have been subject to VAT. Some charities may prefer for the grant to be subject to VAT as the grantor may be able to recover the VAT charged and by charging VAT the ability of the charity to recover VAT on its costs is improved.

VAT is a complex area and charities should consider taking professional advice before entering into such contracts.

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