What is grant income?
Grant income is money given to you by the government, charities, or other organizations to help you with specific projects or activities. It’s important to keep track of this money correctly to ensure your financial records are accurate.
Are grants taxable?
Yes, grants are generally considered taxable income, just like any other income your business earns. This means you’ll need to include grant income in your profit and loss account and pay corporation tax on it.
A significant exception is that charities generally don’t pay corporation tax unless they have significant non-primary purpose trading within the main charity.
Matching income and expenditure
If the grant is for specific expenditure that appears in your profit and loss account, you can defer the grant income to match when the actual expenditure occurs. This way, the income and expenditure will cancel each other out, and you won’t have a tax liability on the grant income. Full details are in our factsheet “Accounting for Grants”.
General funding grants
Grants for general purposes, which can be spent on any costs, must be recognized as income on the date of receipt. Unfortunately, these grants can’t be deferred, so you’ll need to pay corporation tax on them in the year you receive them to the extent they haven’t been spent by the accounting date following receipt of the grant.
Practical tips
- Specific expenditure: Where possible ensure that grant agreements outline the specific expenditure (or more rarely specific outcomes and timeframe) that the grant is supporting. This should include detailed budgets for the grant expenditure
- Plan ahead: If you know you’ll receive a grant which is for general funding, plan your expenditure to match the grant period. This can help you manage your tax liability more effectively
- Keep detailed records: Make sure you keep detailed records of all grant income and related expenditure. This will help you accurately match income and expenses and ensure compliance with tax regulations
- Seek professional advice: Tax rules can be complex, so it’s always a good idea to seek professional advice to ensure you’re handling grant income correctly.
Understanding how corporation tax applies to grants can help you manage your finances more effectively and avoid any surprises at tax time. At Green Accountancy, we’re here to help you navigate these complexities and ensure your grant income is accounted for correctly.
If you would like to discuss this in more detail relating to your business, please feel free to book a free online meeting.
