Tax treatment of grants

Stats Pie Chart - Image Credit Free Range Stock - Jack MorehVAT and Grants

We are frequently asked by clients about the tax implications of grants and donations. It makes sense to check with us as to the status for VAT of your grants, as getting it wrong can be costly – you could have to pay 20% of the grant value as VAT, and if you are not VAT registered you’ll be liable for penalties and surcharges for late registration.

Is your grant really a grant?

Grant agreements are increasingly becoming more complex, with service level agreements and performance related grants now commonplace. This means there is often confusion as to whether you have a grant or a contract, resulting in the VAT status being unclear. Where donations and grants are given to organisations and the individual receives nothing in return, this is non business income and outside the scope of VAT.

If the terms and conditions of the grant mean the funding is given in return for the organisation supplying goods or services then this could count as taxable business income and VAT would be payable on the funding income.

If your income is a grant it is still possible to claim the VAT on the expenditure paid for from the grant providing the expenditure relates to a VAT trade (and you are VAT registered). If your only income is grants or donations, or the activities the grant is funding are separate from your trade, then the VAT on your expenditure cannot be reclaimed.

We offer a review of your grant agreement or contract to help you determine the VAT status of the income, so you can decide whether you need to be VAT registered or not. For further information please contact us.

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