Focus on grants: accounting, tax and VAT
Grants can be a valuable funding source, but they come with specific accounting, tax, and VAT implications. Here’s a summary of key guidance from Green Accountancy to help you stay compliant and informed.
Accounting for grants
Grants should be recognised based on their purpose and conditions:
- General grants: Recognised immediately as income.
- Specific expenditure grants: Deferred until related costs are incurred.
- Capital grants: Deferred and released in line with asset depreciation.
- Charities: Typically recognise grants on receipt, with restricted or unrestricted fund treatment.
Corporation tax on grants
Grants are generally taxable unless you’re a charity with no significant trading activity. Key points:
- General grants: Taxable in the year received.
- Specific grants: Can be deferred to match expenditure, reducing tax liability.
- Planning tip: Align spending with grant periods to manage tax exposure.
VAT checklist for grants and supplies
Not all grants are outside the scope of VAT. Use Green Accountancy’s checklist to determine:
- Is the payment for a supply of goods/services?
- Is the funder receiving something in return?
- Is the agreement commercial in nature?
VAT on grant income and related expenditure
Understanding VAT treatment is crucial:
- True grants: Outside the scope of VAT.
- Mixed funding projects: May require VAT invoices for the full value.
- Input VAT: Can only be reclaimed for business activities.