“Is my income a grant or a fee?” is a common question we get asked. Clearly, a simple grant is outside the scope of VAT so there is no VAT to concern yourself with but where there is a fee, VAT may well be due.
What is a grant?
So what’s a grant? There is no statutory definition but the generally agreed position is that grant funding is freely given and does not give rise to any particular benefit or supply being provided to the grantor. VAT is a tax on supplies so if you don’t supply anything to your funder there can’t be any VAT. It is a donation by another name.
In some cases the matter is straight forward, you ask for donations and give nothing in return but the satisfaction that you have helped a good cause, no VAT. You sell Christmas cards through your shop, the customer is being supplied with goods on a commercial basis, so VAT is due.
But there are grey areas. The Local Council is happy to fund some of our activities but insists on putting a Service Level Agreement (SLA) in place which looks remarkably like a contract. Does this make a difference?
What is being supplied?
It all comes down to what, if anything is being supplied. The fact that there is a potentially lengthy document governing the relationship does not automatically mean that VAT is due.
An SLA is often simply a mechanism to allow the grantor to be satisfied that the funds they are providing are going to be used for the purpose they intended. It does not necessarily mean that there is a supply to the grantor.
So if you go to a potential funder saying that there is a charitable project you wish to undertake and they agree to fund but only on the condition that you sign up to an SLA which sets out how you will operate and report back to them that you have done it, there probably isn’t a supply of services.
Conversely, where a Health Authority identifies a particular welfare service that it wants to provide and puts it out to tender as it does not have the in house resources and you put in a bid to provide that service in return for a fee, VAT is more likely to be due (subject to any reliefs available).
And of course there are situations in between and those are the ones that are harder to judge. What happens if you have been funded by the Council for several projects on a grant basis and then it suggests another project to you and funds that on the same basis and with a similar SLA? The fact that the Council has suggested the project could mean that VAT should be due on that one even though it is not due on the others.
The wording of agreements will be very important. So too will be questions as to who benefits from the activity and the legal position. If a Council or other Authority is legally obliged to fulfil a function but chooses to contract it out, there is likely to be a supply to them rather than the payments being seen as grants. Conversely, if the supplies are made to individuals in the community but an authority simply pays for it then there is usually no VAT.
What does this mean for your charity?
You need to be sure of your VAT position and that your treatment of any grants is in line with HMRC. The impact of not doing so could lead to the subsequent recovery of missing VAT and have considerable negative impact on your available funds.