VAT News

What’s the difference to a charity of securing a grant as opposed to winning a contract

02.10.2010

What’s the Difference to a Charity of securing a Grant as opposed to winning a Contract – VAT concern increases!
 
Talk about a recurring theme! I’ve commented a number of times in our VAT Newsletter as to the difficulties that a charity can face when trying to identify whether it’s activities could be regarded as undertaken in the course of business, and therefore in the scope of VAT management, or outside the scope of VAT in the UK as they are regarded as non-business activities.
 
This issue it seems refuses to lend itself to any generalisations from a VAT perspective but I have to be honest, I did think that a step forward might have been achieved in the early part of this year when the Charity Tax Group (CTG) published a Guidance Note entitled: “Grants and Contracts – Outsourcing by Public Bodies: VAT implications for Charities”.
 
Quite often part of the confusion for our charity clients comes from the fact that different local authorities regard the same arrangements they enter into with the charity in a different light – some say they are contracting with the charity for a service to be delivered, others that the funding agreed is regarded as a grant.
 
So, imagine my interest when I read the following introductory comment from the Charity Tax Group on the circulation of the Guidance Note:
 
“For some time CTG has been urging that, when a public body arranges to outsource services to a charity, the VAT implications for the charity should be taken into account when deciding whether the arrangement should be by way of grant or contract. To help charities and public sector commissioners understand the different VAT implications of grants and contracts, CTG has now produced the attached briefing note: “Grants and Contracts – Outsourcing by Public Bodies: VAT implications for Charities”.

“CTG does not, as a matter of principle, favour contracts over grants or vice-versa. Our position is simply that the VAT implications of a funding arrangement should always be taken into account as one of a number of factors affecting a ‘grant or contract’ decision – indeed, that it would be perverse not to do so. The briefing note aims to explain in a clear and objective way the circumstances in which a charity’s VAT position differs according to whether it receives a grant from a public body or receives fees under a contract with a public body.”
 
I won’t reprise the whole of the Guidance Note, there is a copy on our website at www.centurionvat.com, but there was a lot of commentary in the note about the way in which the public sector would engage with charities and how their decision to use the procurement route for that engagement could infer that they are entering into a business contract with the charity. This particular commentary in the note definitely caught my interest:
 
“What are the VAT implications of different funding methods?
 
14. When a public body outsources a service to a charity there are essentially two different funding methods available to the public body to finance the service: by grant-funding the charity or by procurement under a contract for service (ie by entering into an agreement with the charity, under which the public body pays the charity fees for providing a specified service). Grant-funding is not a business transaction for VAT purposes. Procurement is a business transaction for VAT purposes.”
  
Had the debate moved forward I wondered, was the mist about the difference for VAT between a Grant and a Contract about to lift!! I was even more cheered when I read that the Guidance Note had been reviewed by HM Revenue & Customs and met with their approval. With the increasing move to the use of the procurement process, especially in Wales, to manage public sector projects had we found an effective ruling to help us differentiate between a grant and a contract from the VAT perspective?
 
Imagine my interest therefore when I was approached by a charity to assist in establishing whether a new engagement they were entering into with a local Welsh council was to be regarded as a business supply for VAT purposes. The charity wasn’t VAT registered as it had formerly received grant funding however, this new contract was being let through the procurement mechanism and therefore this was a key factor to consider. Did this make the supply a business contract as distinct from a grant application? If so, we’d need to be looking at whether they should be VAT registered and all the management issues that this brings with it, not least should they charge VAT on their (now business) activity?
 
This was a great opportunity to test with HMRC the implications of the Charity Tax Group note and all that it inferred. A detailed letter was duly drafted and submitted to the Specialist Charity VAT Team that exists within HMRC. Their thoughts on whether this new contract was a supply by way of business or a non-business grant arrangement made no mention of the fact that the contract had clearly been let through the procurement process and that any institution, charity or otherwise, could be bidding to deliver the services… interesting I thought. So, I responded and asked whether this dedicated Charity VAT team in HMRC had seen the note and what their opinion was as to the position of procurement let contracts in determining the VAT treatment.
 
And the response? That the Charity VAT team in HMRC had not seen the Guidance Note before and they had a concern that the inference that using the procurement process would influence the VAT treatment was apparent in the note and was not the view that they might take. So, it’s not over yet and I’m awaiting a formal response from that section after they have referred to matter to the HMRC Policy team. Don’t worry though, I’ll keep you all posted on how it turns out. However, we remain where we have been for some time now and that is needing to look very closely at the nature of arrangements that our charity clients enter into with public sector bodies in Wales or across the UK, in order to establish the VAT treatment to be followed.
 
To be fair, I have asked the Charity Tax Group in London as to their view on the inference which could be taken from the note as to the impact of procurement on the treatment for VAT on the supply and indeed where it was approved in HMRC if not in the Charity VAT Team. Their response was that they didn’t feel that that inference on the impact of procurement could be taken and that the guidance offered a balanced view of the position and that it had been the HMRC Policy Team dealing with supply that had given their approval.  

So watch this space and if you have a quiet 5 mins or can’t sleep one night have a read of the guidance note and see what you think, you’ll be in good company, HMRC’s Charity VAT team are reading it as well!