Income that is labelled as a “grant” can sometimes be subject to VAT or count towards the VAT threshold. The underlying rules are:
- Income that is in return for a supply of goods or services is subject to VAT or counts towards the VAT threshold. Or,
- Income that is freely given to support a project or business, with no supplies in return, is “outside the scope of VAT”. This is not subject to VAT and does not count towards the VAT threshold.
Difficulties arise when income that is labelled as a grant has some element of making a supply. For example, if a council is funding a social enterprise, this could be:
- Related to the social enterprise providing services to the community, such as morning clubs for the elderly. This would be the council paying for a service even if the contract is worded as a “grant”. Hence subject to VAT or counting towards the VAT threshold. Or,
- The council are supportive of the social enterprises activities but are not paying for a service to be supplied. This would be a grant and not subject to VAT.
This is a subtle distinction! Our VAT checklist for grants and supplies can help you establish whether income is for a service (subject to VAT) or a grant (usually outside the scope of VAT).
The questions within this checklist are provided by HMRC. The answers should be judged on balance with no bias. If there are predominately Yes / No answers in either section, this will help decide (but not define) whether income is for services or is a grant.
If you would like to discuss this in more detail relating to your business, please feel free to book a free online meeting.
