A client recently asked me if grants subject to VAT?
Here is what we found out. We hope you find this helpful.
This is a question frequently asked by clients who receive grants of over £85,000 (currently the VAT registration threshold) and wonder if they must register for VAT.
There is no definitive guidance on this complex area. Grants are generally outside the scope of VAT unless there are actually a payment for something such as services. When we say they are outside of the scope of VAT they can be ignored in calculating whether the VAT threshold (currently £85,000) has been exceeded. It is therefore important to look at whether any consideration is given in return for receiving the grant.
Sometimes something is described as a grant and is actually a payment for something (for example X number of training courses), even though the recipient is different from the grant giving body, so it is within the scope of VAT. Where something is freely given without the expectation of receiving something in return it is a true grant and you can exclude it when calculating whether the VAT threshold is met.
It’s probably worth going through the attached guidance for each grant to see how many points are satisfied. These do come from government guidance but they are not a complete list. In general the VAT supply and consideration manual deals with VAT on grants. See vatsc06300 onwards on grants.
Extracts from the VAT Supply and Consideration Manual
relating to VAT on grants
What matters when determining if there is a supply is the extent to which goods or services are provided in return for the payment? An outside the scope grant could share some features with a supply made for a consideration – such as being funding for a specific purpose, and being governed by a set of terms and conditions. However grants that are not consideration for supplies are freely given and there is no expectation of goods or services being supplied to the funder, or a specified third party, directly in return for the money paid.
Consideration: Payments that are not Consideration: Grants: Factors indicating the payment is a grant
The following factors are taken from precedent cases. They are not in any particular order, all factors should be considered when making a decision. The more there are in your situation, the more likely it is that the payment is outside the scope of VAT.
The factors to consider are:
the payment was made following a grant application process run by an organisation that regularly provides outside the scope grants, such as central or local government are the funders the beneficiaries of the project? To be outside the scope of VAT a grant should be freely given. In using the payment, the supplier carries out its own charitable aims and objectives with the assistance of the money which is given with no expectation of direct benefit in return the funder will not attempt to control how the money is spent beyond seeing that the funds are properly managed. Any monitoring is no more than simply ensuring the payments are appropriately spent the supplier will set its own targets as opposed to the funder imposing specific targets the payments are not treated as trading income or expenditure in the accounts of either party if the funding is withdrawn there is no legal redress for the supplier to have the payment reinstated funding is drawn down by the supplier as a reimbursement of expenditure incurred, rather than an advance payment for services. Alternatively, there may be a ‘deficit funding’ arrangement whereby the funder agrees to plug any funding gaps the funding is provided under a statutory provision that empowers the funder to make a grant. This would be mainly relevant if the funder is a Government department or local authority there is a ‘clawback’ provision within the agreement. Funders use this method to reclaim their funding in circumstances such as where not all the money was spent or if the terms of the agreement were not complied with. In contrast, a contract for a supply should not contain a ‘clawback’ clause as there is no automatic right to reclaim any money. The money is consideration for the supply and the solution for reclaiming the payment in any subsequent breach of contract is to sue for damages.
Consideration: Payments that are not Consideration: Grants: Factors indicating the payment is consideration for a supply
The following factors are taken from precedent cases. They are not presented in any particular order, all factors should be considered when making a decision. The more there are in your situation, the more likely it is that the payment is consideration for a supply. The factors to consider are:
who initiates the agreement? If the funder is seeking services in return for their payment then this indicates the payment is consideration for supplies made to them if the funder is the direct beneficiary of the supplies. The funder believes they are receiving something in return for the payment. the supplier undertakes outsourced activities on behalf of the funder where the services provided are ones ordinarily provided by the funder so the supplier is acting as a subcontractor. Examples include the provision of functions ordinarily undertaken by local authorities that they have a statutory duty to perform and would face sanctions if they did not happen the contract is commercial in nature ie it is a legally binding contract connected to a business activity. This means looking for indicators such as penalty clauses being in place if the supplier does not fulfil their responsibilities and so is in breach of contract the supplies are undertaken as an economic activity. It is not necessary for the supplier to have a profit motive, but the type of supplies should have the potential to make a profit the relationship between the funder and supplier will be at ‘arms length’ and there will be an absence of control from the funder in the supplier’s decision making process the payments made by the funder to the supplier are made specifically for the supplier to provide particular services to its clients. The fact that the funder does not know at the time the service is provided the identity of the client or the even the specific service which is being provided is not relevant each activity carried out by the funder gives rise to a specific and identifiable payment. This is an agreed sum, either a single payment or a sum per activity ie the more work done, the greater the payment. For this to happen there is probably a detailed recording system for timekeeping, outputs achieved etc the funder will attempt to control how the money is spent, maybe imposing specific targets in terms of quantity, quality, timeframes etc. Any monitoring is more than simply ensuring the payments are spent properly and is to ensure that specific supplies are made if the funding is withdrawn there is legal redress for the supplier to have the payment reinstated or claim compensation the payments are treated as trading income or expenditure in the accounts of either party.
Consideration: Payments that are not Consideration: Grants: Factors that are neutral
The following factors are taken from precedent cases. The court decisions referring to these factors regarded them as neutral, so their presence in an agreement generally does not indicate either way whether the payment is an outside the scope grant or consideration.
The neutral factors are:
the payment is described as a grant in the contract and correspondence. Whilst the wording of a contract is important, what the payment is called does not determine its VAT treatment the level of detail within the contract/agreement does not point in either direction, ie it is wrong to say that the more detail there is, the more likely there is a contract for a supply the supplier is obliged to provide reports and information to the funder. This is not an indicator either way as a condition in the agreement to report on how the payments are used will be required either to confirm supplies were made or in a grant situation act as good housekeeping to ensure the money is spent for its intended purpose the supplier’s activities and the number of projects undertaken are influenced by the payment ie they would be significantly curtailed in the event of a withdrawal or reduction in funding. Although this could indicate there was a supply made to the funder, you must still look at whether a supply is actually made to them, as a withdrawal of a grant may equally mean a reduction in service provision
https://www.gov.uk/hmrc-internal-manuals/vat-supply-and-consideration/vatsc06300 onwards on grants in general
https://www.gov.uk/hmrc-internal-manuals/vat-supply-and-consideration/vatsc06110 on donations
This website uses marketing and tracking technologies. Opting out of this will opt you out of all cookies, except for those needed to run the website. Note that some products may not work as well without tracking cookies.Opt Out of Cookies