Updated HMRC guidance on grants versus consideration for a supply

One contentious area in the world of VAT is the treatment of funding received by charities. This matters because grant income is non-business in nature and outside the scope of VAT. Thus, no VAT will be payable but there may also be VAT recovery implications. On the other hand, if the funding is consideration for a supply, the income will be taxable and related input tax will be recoverable. The consequences of getting it wrong can be very costly.

Earlier this year HMRC finally published their long-awaited, updated guidance which can be found in their internal manual.

A key point is that for a transaction to fall within the scope of VAT, there must always be a supply, consideration and a direct link between the two. HMRC have set out helpful lists of indicators, including neutral ones to help determine the correct VAT treatment. The indicators have been taken from a wide array of court decisions, details of which can be found in the same HMRC guidance. HMRC stress that all factors must be taken into account. We have set out the main factors below:

Factors pointing towards outside the scope treatment:

• the payment was made following a grant application process
• the funders are not the beneficiaries of the project
• the funder will not attempt to control how the money is spent beyond good housekeeping
• the payments are not treated as trading income or expenditure in the accounts of either party
• funding is drawn down by the supplier as a reimbursement of expenditure incurred
• there is a ‘clawback’ provision within the agreement but if the funding is withdrawn, there is no legal redress

Factors pointing towards a taxable supply:

• the funder is seeking services in return for their payment
• the contract is commercial in nature, e.g. there will be penalty clauses in place if the supplier does not fulfil their responsibilities
• the supplies are undertaken as an economic activity
• the funder will attempt to control how the money is spent
• if the funding is withdrawn there is legal redress for the supplier to have the payment reinstated or claim compensation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

The neutral factors are:

• the payment is described as a grant in the agreement because what the payment is called does not determine its VAT treatment
• the level of detail within the agreement does not point in either direction
• the supplier’s activities and the number of projects undertaken are influenced by the payment

HMRCs detailed guidance is to be broadly welcomed with the caveat that it is not legally binding. Caution is therefore necessary when making decisions based on that guidance.

For further information or advice, please contact one of our EQ Charity specialists via info@eqaccountants.co.uk or call your local office contact.