Understanding VAT implications for grants and contracts

Navigating the difference between grants and contracts can be complex, especially in terms of VAT where grants have a different treatment to contracts.

In our latest blog, Ellen Main-Jeffrey, Head of VAT Services at Burgis & Bullock, explains the key distinctions and VAT implications when dealing with grants and contracts.

Ellen Main-Jeffrey

Understanding the nuances between grants and contracts in terms of VAT is important for financial management and VAT compliance and mistakes can be very costly.

The first thing to note is that whilst grant funding is outside the scope of VAT and not recorded on the VAT return, when a business or organisation receives that income it can still have implications for VAT recovery. The second point to note is very often grant agreements are ambiguous or some if not all of the funding may not be grant funding but payment for services

So, when is grant funding outside the scope of VAT?

In principle, this is the case if the funder has no expectation to receive anything in return, but there are a range of factors that are important to consider if the position isn’t clear.

Grant funding much of the time will come with requirements for regular reports on how the money is being spent and an acknowledgement in the recipient’s annual report. This level of financial housekeeping is acceptable, but if there is anything further HMRC will consider this a supply for VAT purposes and, as a consequence, the funding will be liable to VAT

A key factor is how the funding was obtained. If the recipient approaches the funder to request grant funding, it is much more likely to be considered a grant for VAT purposes.

Other points to consider are; who is the beneficiary of the project and who controls the money? These are both important, but ultimately it all comes back to whether the funding party receives anything in return.

HMRC’s internal guidance, based on precedent tax cases, lists the following indicators of whether a payment is a grant or not.

Factors indicating the payment is a grant include:
  • The payment is made following a grant application process run by an organisation which regularly provides outside the scope funding.
  • The funding is freely given with no expectation of direct benefit in return
  • The funder does not attempt to control how the money is spent other than general housekeeping monitoring measures to ensure the money is appropriately spent
  • The recipient sets its own targets
  • The payments are not treated as trading income or expenditure in the accounts of either party
  • There is no legal redress if the funding is withdrawn
  • Funding is drawn down as a reimbursement of expenditure
  • The funding is provided under a statutory provision which empowers the funder to make a grant
  • There is a clawback provision if the terms of the agreement are not met.
On the other side, factors indicating a payment is not a grant include:
  • The funder initiates the agreement seeking services in return for payment.
  • The recipient undertakes outsourced activities on behalf of the funder.
  • The agreement is commercial in nature, i.e. it is a legally binding contract with penalty clauses if the supplier does not fulfil their responsibilities.
  • The payments are made specifically for the supplier to provide particular services to its clients, etc.
  • The payments are made with reference to particular activities or work done.
  • The funder will attempt to control how the money is spent.
  • If the funding is withdrawn there is a legal redress for the supplier.
  • The payments are treated as trading income or expenditure in the accounts of either party.
But what does this all mean in practice?

Well, it is very common for payments for supplies to be described as grant funding in agreements.

This could range from a clear requirement to supply services in return for the grant funding in a Service Level Agreement, to a subtler point such as a requirement to ensure the logo of the grant-giving organisation is featured on a website and marketing collateral.

Now, you can use the funder’s logo, and it won’t have VAT implications, provided its use is not a condition for the receipt of grant funding.

But unfortunately, the position is not always clear cut so it will be important to look at all of the factors listed above to make a decision. Nearly all grant funding is on a VAT inclusive basis so the burden of paying the VAT if the parties get it wrong is on the recipient. 

If doubts remain, discuss them with your funder, would they be willing to accept a VAT invoice in the event of a challenge by HMRC?

In conclusion, as you can see, understanding the nuances between grants and contracts is essential for accurate VAT reporting and compliance.

Our team are on hand to advise and explain any matters relating to VAT and grant funding, and have extensive experience in supporting clients to effectively manage their VAT responsibilities.

To find out more about our VAT services visit: https://www.burgisbullock.com/services/vat-services/

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