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HMRC guidance defines grants and contracts for VAT purposes

Mike Wakeford

HM Revenue & Customs has published updated guidance on the VAT treatment of grants and contracts to clarify which grants are outside the scope of VAT and which are subject to VAT.

This is an important issue as grants that are given with no strings attached are regarded as not being a supply for VAT purposes because nothing is being provided in return for the payment.

The Charity Tax Group said it has been engaging with HMRC on the replacement guidance and was pleased to see the inclusion of new case law updates and greater clarity about what grants are subject to VAT.
Within the guidance HMRC have published a list of things that would indicate that a grant is liable to VAT. These include:

-    If the funder believes they are receiving something in return for a payment
-    If the contract between supplier and funder is legally binding and connected to a business activity
-    If the funder will attempt to control how the money is spent, maybe imposing specific targets in terms of             quantity, quality and timeframes

HMRC’s guidance says in summary: ‘The principal factor to consider is if a specific supply is made to the funder or a third party in return for a payment. If so then the payment is consideration for a supply, but if this direct link is not established then the payment can be treated as outside the scope of VAT.’