HMRC’s Updated Guidance on VAT and Grant Income
Grants are one of the funding routes that enable charities to provide valuable services that are integral to many local communities. However, this funding route brings with it some complexities when it comes to VAT.
HMRC’s new guidance is designed to make it easier for those who are in receipt of grant funding to determine whether the payment they receive is a grant or whether it is actually consideration for a supply. This is important as grant funding is typically outside the scope of VAT whereas a payment for a supply could be subject to VAT (depending on what is provided).
What is a grant?
There is no official definition of a grant from a VAT perspective and this makes it difficult to distinguish between grant funding and consideration for a supply. Simply labelling a payment a grant is not conclusive and therefore it is important to identify what happens when the payment is made. To be within the scope of VAT there must be a supply, consideration and a direct link between the two. A payment is not consideration for a supply if one of these is missing. The important question to consider when determining whether there is a supply for VAT purposes is the extent to which goods or services are provided in return for payment.
What indicates a payment is a grant?
- The funder has the legal power to award a grant
- The payment is made after a grant application process
- The funder does not dictate how the funds are spent beyond seeing that the funds are properly managed
- There is a clawback provision in the agreement
- If the grant is withdrawn, there is no legal redress for the supplier to have the payment reinstated
- The funder does not impose specific targets
What indicates a payment is a supply?
- The funder expects to receive something in return for the payment
- The funder will attempt to control how the money is spent
- The contract is commercial and may include penalty clauses for not meeting responsibilities
- The contract between the funder and supplier is concerning a business activity and is legally enforceable
- The level of funding is directly linked to the level of output of the supplier
- If the funding is withdrawn there is legal redress for the supplier to have the payment reinstated or claim compensation
What about subsidies?
There are two types of subsidy detailed in HMRC’s guidance:
- A global subsidy to cover operating costs
- A subsidy directly linked to the price of a supply
Global subsidies are usually from public funds and intended to benefit the public. These share characteristics with grants as the funder does not receive anything in return for the payment. As a result these are typically outside the scope of VAT.
A subsidy that is directly linked to the price of a supply, thus reducing the price to the customer, will form part of the consideration received by the supplier. This means VAT will be liable on the full amount received by the supplier, rather than the subsidised price paid by the customer as the subsidy represents part consideration for the supply.
The updated guidance is helpful clarification from HMRC and we recommend that those in receipt of this type of funding review how the money has been treated for VAT purposes.
For further information or to discuss your funding streams please contact Alison Birch.