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Steve Allen of VAT Advisers Ltd provides a VAT tip for charities raising funds via grants.

Introduction

Although charities often rely on grant income in order to be able to fulfil their charitable aims, the fact that grants are not ‘consideration for a supply’ means they are a non-business income stream, and as such, none of the VAT incurred on related costs can be recovered.

The lost input tax effectively reduces the grant by an equivalent amount, so any means of preventing that loss will restore it to its full value. As it happens, there are actually two legitimate ways of doing this, and they are outlined in the following example:

Grant Income:

Local authority grant of £100,000

Related Expenditure:

Salaries £60,000

Consultants £40,000 plus £7,000 VAT

Analysis:

Loss of irrecoverable VAT is £7,000, but no impact on VAT return, as all outside the scope.

Solution 1

Convince the funder that they are contracting with you for the provision of a service, and that VAT has to be charged on the grant income. All the VAT on related expenditure is then recoverable.

Grant Income:

Services contract with local authority for £100,000 plus £17,500 VAT

Related Expenditure:

Salaries £60,000

Consultants £40,000 plus £7,000 VAT

No loss or surplus (but a temporary cashflow advantage of £117,500 less £107,000 = £10,500)

VAT Return

Output VAT on sales £17,500

Input VAT on purchases £7,000

Net VAT payable to HMRC £10,500

Solution 2

Instead of going down the contract route, ensure the value of the irrecoverable VAT is included in the grant application from the outset. The grant funders will accept it as a legitimate related cost.

Income:

Grant from local authority of £107,000

Expenditure:

Salaries £60,000

Consultants £47,000

VAT Return

No loss or surplus – VAT return unaffected.

Summary

By considering the value of the irrecoverable VAT at the beginning of the grant process, charities will give themselves an opportunity to try to negate the loss through the use of one of two solutions outlined here.