Is your grant income subject to VAT?
Your charity has received a grant to help fund specific projects and you are concerned that the strict conditions imposed make it subject to VAT. Are your concerns justified and what checks can you make to ensure there are no problems?
Status of grant provider
The first issue to consider is if your grant has come from a body or organisation that often gives funding for charitable or community causes. You can usually check its aims and objectives on its website or other publications. If its overall strategy is to support good causes - rather than benefit from services - this indicates your grant will not be subject to VAT.
If grant income is not relevant to a supply of goods or services, it is excluded from Box 6 of your VAT returns.
Does the funder get benefits?
You should stand back and ask the question: is the funder receiving any direct benefits from the payment of your grant? For example, is it or any third party receiving services in return for the payment?
You should review the terms and conditions it imposes in the contract about how you must spend the money. There is no problem with the grant provider checking that money is spent wisely but it should not make specific demands that could indicate it is gaining benefits.
A useful indicator that a grant is non-taxable is a clause in the agreement that any unspent funds will be returned to the funder.
Payments that are not grants
If your funder expects to receive specific services in return for the payment, this indicates it is not giving you a grant without conditions. Is the arrangement “commercial in its nature”, a phrase used by HMRC in its manuals?
Example. Good Causes runs a charity shop and is registered for VAT. It has received an annual grant of £20,000 from the local council to help with its overheads. A condition of the grant is that Good Causes must lock and unlock the council toilet facilities that are next to the shop each day and also confirm they are working properly. The benefits supplied to the council mean that the grant will be subject to VAT.
Even if your charity has to charge VAT on the grant, this will not always be an extra cost to the funder. For example, local authorities get special VAT recovery on their non-business activities with what is known as a “section 33” claim, e.g. providing public washroom facilities would come within this category.
Final tips
There are many issues to consider when deciding if your grant might be subject to VAT:
- Is the contract commercial in its nature, e.g. a legally binding contract connected to a business activity rather than a community project?
- The existence of penalty clauses for failing to carry out a task or course of action indicates a commercial contract might be in place.
- Treating the money as a trading receipt in your accounts indicates a service agreement rather than a grant.
Just describing a payment as a grant in the contract does not automatically prevent a VAT problem. It is the terms and conditions of the arrangement that matter rather than the wording, i.e. what you must do or not do for the receipt.
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