HMRC have published updated VAT guidance in relation to the receipt of grants. This is available here but the factors to consider when determining the VAT treatment of payments received are detailed below.
A grant is understood to be a freely given payment for which nothing is given in return. The receipt of such a payment is not a supply for VAT purposes. Many payments are labelled as grants but in reality are payments for supplies and care should therefore be taken to ensure the VAT treatment is correct. For a transaction to fall within the scope of VAT there must always be a supply, a consideration and a direct link between the two. A payment is not consideration for a supply if one of these factors is missing.
Factors indicating the payment is a grant
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- if the funding is withdrawn there is no legal redress for the supplier to have the payment reinstated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.
Factors indicating 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
Factors that are neutral
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.
