HMRC Updates Guidance on VAT Treatment of Grants - What Does This Mean for Charities?

In deciding whether VAT is payable, HMRC will consider a number of factors.

One key consideration is whether on the facts (rather than simply looking at names or labels), complying with the conditions of the grant means the charity receiving it will be supplying services to the funder. Charities must therefore consider whether factors like these mean that the 'work' they are carrying out are taxable.

What Will HMRC Be Looking Out for?

HMRC will look out for a 'taxable supply' (ie a supply of services which attracts VAT). Anything which does not fall into this category is treated as outside the scope of VAT. HMRC will look at the substance of the arrangement between the parties when considering whether there is a supply of services by the charity to the funder in return for what (based on the facts) turns out to be a payment, rather than a grant. HMRC will consider factors like:

• are there any conditions attached to the payment?
• what will the payments be used for?
• if the funder does not benefit directly, does any third party receive a benefit?
• is there a contract and if so, what terms and conditions does it contain?

The principal consideration is likely to be what the funder or a third party receives (if anything) in return for the 'grant'. 

What Should Charities Consider?

HMRC provides a number of examples to help decide if a grant to a charity is in fact payment for the supply of services.

• For example, who initiates the agreement? If the funder approaches the charity looking for services in return for their 'grant' then this could indicate (if the funder, or a third party connected to it, is the direct beneficiary of the supply) that the funder believes they are receiving something in return for the payment, which will attract VAT.
• If the charity will take on activities which would usually be outsourced to the funder, this could also be a supply of services. This could mean the charity would potentially be acting as a subcontractor of the funder. For example, a charity could take on a function ordinarily performed by local authorities, such as caring for those in need. Performing those functions on behalf of a local authority could mean that the charity is supplying a service.

HMRC suggests that funding is likely to be a grant if the payment is made after a grant application process. That said, central or local governments often run application processes, and it is still possible that (as in the example above), the arrangement could turn out to be to be a supply of services.

Charities must therefore make sure they consider each grant arrangement carefully and decide whether it could be a situation which attracts VAT.

What Next for Charities?

This could affect many charities in a number of scenarios.

The Charity Finance Group has criticised HMRC, saying that this guidance fails to reflect the reality on the ground. For example, the guidance states that a payment is more likely to be outside the scope of VAT if charities set their own targets instead of the funder. However, this does not recognise co-created targets. Another suggestion is to use more unrestricted grants (ie one that is not measured by targets), but this arguably contradicts other sector guidance, particularly given that the Charity Commission is looking for more organisations to use restricted grants.

The guidance means charities are able to rely on a government publication. Charities should work through each situation looking at the facts to decide whether VAT may be payable and where the position is not clear should seek advice.

For more information, please contact Kate Parkinson in our Charity Law team on 0117 314 5460.