Grants vs Contracts
In summary, a charity which receives a grant from a local authority will treat that grant income as a ‘non business’ income for VAT purposes. The impact of this treatment is that grant income doesn’t get recorded against the VAT registration threshold limit, which is set at £73k, of taxable business income. Therefore, if the charity was already VAT registered the grant, being non business income, will not attract VAT.
The downside for a charity is that, unlike a local authority, they cannot recover the VAT that they incur on the costs that support their non business/grant funded activities. They therefore have to cost this irrecoverable VAT into the project budget in order not to underestimate the level of grant requests they should be making.
However, if a local authority decides that the funding pot it is managing should be distributed through the procurement route as opposed to a grant application process then this creates different VAT issues for the charity applying for the contract.
If a charity tenders for funding through a procurement process then it will be highly likely that HMRC will regard it as making a business supply of whatever the related contract is for, be it vocational training under a pathways to work initiative or similar, therefore, in becoming a business supplier the charity will have to establish what the VAT liability of that supply to the fund-holder is.
If they overlook this fact and end up making taxable supplies and fail to VAT register; or if already VAT registered from other recognised business activities, fail to account for VAT on the supply to the authority; then it is likely to create concerns for them.
Charities may also decide to tender for a contract through their trading subsidiary rather than through the charity and this can also cause VAT issues as VAT reliefs available to a charity, such as the VAT exemption of the supply of welfare services by them, is not an exemption relief which is extended to their trading subsidiary even though it might be making the same type of welfare service supply.
Feedback from charities across Wales is that they are finding that some local authorities are approaching funding taken from the same central resource pot in different ways.
This difference in the VAT treatment and impact on the charity sector as to whether they receive Grants (non business income) or Contracts (business income which needs checking on its VAT treatment) has been recognised by the Charities Tax Reform Group and recent guidance for the public services sector has been issued.
It is important to raise awareness on this issue across funders including the local authority sector in Wales, as more awareness of the matter will ensure the overall ‘best use’ of public funds within the public and third sector.
In conjunction with the WCVA (Wales Council for Voluntary Action) we have been delivering short VAT training sessions on the difference between grants and contracts for the charity sector in Wales but it is clear that funding budget holders have a key role to play.
If this is an issue which has affected your organisation and you would like to discuss it further, please get in touch with Liz at Centurion.