Grant income can take many forms including private and government grants. The most important point to consider in regards to grant income, is whether the income really is a grant.  The labelling of a payment to you as a grant does not make the income necessarily a grant, even income from a government department.

 

Grant income is income received by you (or your company) for which you do not have to provide anything in return.  There may be a requirement to report back on your activities and you may only be able to spend the grant on certain expenditure, however this in itself does not stop the income being grant income.

If you have to provide goods or services to the person or organisation providing the grant, then it is not grant income. For example, if DEFRA have an obligation to carry out a survey, and pay you or your company to do this work, that is a trading transaction not a grant, even if DEFRA label the income as a grant.

 

Accounting for grant income

If the grant is for expenditure that you would normally record in the profit and loss account, the grant income is reflected as income in your profit and loss account.  Such a grant may be deferred if it relates to specific expenditure which has not yet been incurred.  Deferred means recorded on the balance sheet and released to the profit and loss account when the expenditure is actually spent.

If the grant relates to equipment or other fixed assets then the grant income is deferred, and released to the profit and loss account to match with the depreciation of the grant purchased asset.

 

Corporation tax and income tax on grant income

Grants are generally taxable income, the same as any other income arising in your trade.  If the grant is for expenditure that appears in your profit and loss account and you can defer the grant income (as above) then you may not have a tax liability on the income as it will be matched with its intended expenditure.  Thus the income and expenditure will cancel each other in your accounts, not affecting your profit or tax figures.

If the grant income is spent on equipment then the grant is not taxable but there is no capital allowance available on the equipment expenditure.

 

VAT on grant income

Grant income is outside the scope of VAT, therefore no VAT is payable when you receive a grant.  Care is needed as HMRC are particularly keen to ensure that income is not excluded from VAT merely on the basis of a label being applied to the income.

Assuming the grant is outside of the scope of VAT it is usually still possible to reclaim the VAT on the expenditure paid for from the grant.  This VAT can be reclaimed (subject to being VAT registered and normal reclaim rules) if the expenditure relates to a VAT trade.

If your activities are entirely grant (or donation) funded, or the activities in question are separate from your trade, then the VAT on your costs cannot be reclaimed.

 

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