VAT Update on Grants

A short while ago grants received by a charity came under the scrutiny of HM Revenue & Customs regarding their VAT treatment and whether the grants constituted a VAT’able supply.  After there being some confusion over the interpretations of the guidance issued by HM Revenue & Customs, in January 2018 they updated their guidance to make it clearer for charities. 

So what is the new guidance, and what do charities need to know?

The guidance itself is named ‘Consideration: Payments that are not Consideration: Grants’ within HM Revenue & Customs internal manual VATSC51600, which can be found here.

First of all, what is a grant?  The term ‘grant’ itself can be misleading, so from a VAT perspective you must consider what the money is for, and whether the payment is consideration for a supply for VAT purposes.  You must therefore look at the merits of each grant individually, and assess each payment as to whether it is within the scope of VAT.

For a transaction to fall within the scope of VAT there must be a supply, a consideration and a direct link between the two.  A payment is not a consideration for supply if one of these factors is missing. 

HM Revenue & Customs have provided factors indicating the payment is a grant, which can be found here.  All of these factors will need to be taken into account, but they include points such as ‘the funder will not attempt to control how the money is spent beyond seeing that the funds are properly managed.  The more of these factors that are present, the more likely it is that the payment will be outside the scope of VAT.

Likewise, HM Revenue & Customs have also issued guidance relating to factors indicating the payment is a consideration for supply, and therefore VAT’able.  This guidance can be found here.  The more of these factors that are present, the more likely it is that VAT should be charged on the payment, or the charity will need to consider registering for VAT.

So, what do you need to do as a Trustees and Senior Managers within a charity?  Firstly you should familiarise yourself with the various factors noted above.  It may be helpful to create your own ‘crib sheet’ that can be updated/used on future grant applications. 

We then advise all of our clients to maintain and update their grant register.  This register should track all stages of the grant application process, from when the initial application was made, any correspondence received from the provider, all the way through to whether a grant has been awarded or not.  This register has proven to be a very useful internal control, and aids with any audit and independent examination process.  This register will also prove as a useful tool in deciding whether or not a grant is inside or outside the scope of VAT.  Whenever a charity makes a decision on whether a grant is VAT’able or not, adequate notes should be made based on the factors above, and then recorded in the grant register.  This way, in the unlikely case that HM Revenue & Customs wish to challenge a decision made by the charity, the charity will have adequate evidence to justify why they have taken the approach they have.

Should you be in any doubt over the grants of your charity, please contact a member of the charity department for further assistance.