Is your grant income subject to VAT?

March 4th 2024

Your charity has received a grant to help it to fund specific projects and you are worried that the strict conditions imposed will make it subject to VAT. Is this the case and what checks can you make to ensure there are no problems?  Gail Trojan provides the answers.

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 that 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 benefit?
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.

Worthy Charity 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 Worthy Charity must lock and unlock the council toilets 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 must 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.

There are many issues to consider when deciding if your grant might be subject to VAT:

1. Is the contract commercial in its nature, e.g. a legally binding contract connected to a business activity rather than a community project?

2. The existence of penalty clauses for failing to carry out a task or course of action indicates a commercial contract might be in place.

3. 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.

If the grant provider imposes conditions in the agreement, you must be clear whether this is in respect of a service that could be subject to VAT or just good housekeeping to ensure that you spend the money wisely. Review each contract to check if you must charge VAT or not.

To discuss this VAT scenario further or other similar related issues please do contact our team directly.