Accounting and Tax Treatment of Re-granting Funds

1. Overview

Many organisations receive grants from funders and then distribute part or all of those funds as sub-grants to third parties. The accounting and tax treatment depends on whether you act as a principal or an agent in the transaction.

2. Principal vs Agent – Key distinction

Principal (Income & Expenditure)

You are the principal when:

• You have discretion over who receives the sub-grants.
• You may also decide amounts or timing (even partially).
• You bear responsibility for compliance and risk.

Accounting treatment:

• Grant received → Income.
• Sub-grants paid → Expenditure.
• Both appear in your Statement of Financial Activities or Profit & Loss.

Corporation tax:

• Grant income is taxable (unless exempt as a charity).
• Sub-grant payments are generally allowable expenses if the head grant requires the sub-grants as part of the expenditure of the grant.  If you simply decide to make a grant to another organisation this could be a distribution of profits rather than an expense, which then doesn’t attract corporation tax relief, just as a dividend doesn’t attract corporation tax relief.  As a separate matter, donations to charities do usually attract corporation tax relief.

Agent (Balance Sheet Only)

You are an agent when:

• You have no discretion over recipients, amounts, or timing.
• You simply administer funds on behalf of the funder.

Accounting treatment:

• Funds received → Liability (e.g., “Funds held for third parties”).
• Payments → Reduce liability.
• No income or expenditure recorded.

Corporation tax:

• No tax charge arises because funds are not your income.

3. Practical examples

4. Summary checklist

• • Do you have discretion over recipients? Yes → Principal – show in income and expenditure account.
  • Do you control allocation or timing? Yes → Principal – show in income and expenditure account.
  • No discretion at all? Agent → Balance Sheet only.

Journal entry examples

Agent scenario (Balance Sheet Only):

• When funds received: Dr Bank £100,000 Cr Funds held for third parties (liability account) £100,000
• When paid to sub-grantee: Dr Funds held for third parties £100,000 Cr Bank £100,000

Principal scenario (Income & Expenditure):

• When grant received: Dr Bank £100,000 Cr Grant income £100,000
• When sub-grant paid: Dr Sub-grant expenditure £100,000 Cr Bank £100,000

Common pitfalls

• Misclassifying agent transactions as income → inflates turnover and potentially creates a tax liability.
• Failing to document grants fully → HMRC may challenge the situation.
• Sometimes onward grants are distributions of profit → disallowed for corporation tax