Over the last few months we’ve reviewed many a charity funding agreement to confirm whether the income is a grant (and outside the scope of VAT) or consideration for a supply (and potentially subject to VAT). This is often referred by the audit RI before they sign off the audit.

There is no one defining factor as to whether the funding is a grant or not and multiple factors as well as the substance and form need to be taken into account when reviewing the agreement. How the funding was obtained (applied for or put out to tender), the wording in the agreement (funding or contract for services) and clawback provisions are all important.

A good starting point is to consider whether the provider of the funding is getting anything directly in return. This can be relatively obvious, such as the provision of a service/information. Or it can be less obvious, such as nomination rights or an entitlement to access the deliverable for a period of exclusivity. In some instances, it can also be obscured, such as a requirement to display the funding providers logo in a prominent position. Whilst not defining it is also important to look at the accounting treatment including with the income is in a restricted fund.

The implications of getting the VAT treatment wrong can result in a requirement to VAT register, and a VAT liability which cannot be passed onto the funder. In addition, it could have a knock-on impact to VAT recovery of the organisation as a whole. As such, it is essential that your client takes advice at an early stage. There are also opportunities, if the grant is found not to be a grant funding including additional VAT recovery on costs

Ordinarily, VAT cannot be recovered on costs relating to grant funded projects. However, where the grant is subsidising a business activity generating VATable income, the VAT on costs may still be recoverable in full.

Not all bad news

For one client we recently identified that a significant grant funding agreement was actually consideration for a supply. We managed to agree an exception from registration with HMRC. Our client did not have to register for VAT and lose any of the income, albeit we were making the application retrospectively and there was an element of good luck in the fact pattern.

If you have charity clients that generate income through grants, let us take a look and review the position.