VAT treatment of DfID funding – HMRC guidance to the Charity Tax Group

The following guidance was sent by HMRC to the Charity Tax Group in November 2013 in respect of the VAT treatment of funding received from public bodies for overseas aid projects.

“The Department for International Development is the public sector body, a Central Government Department under the Secretary of State for International Development, charged with the formulation and delivery of the UK Government’s international aid programme. It carries this out by funding various bodies, including humanitarian aid charities, to undertake the detailed project work and consultancy on the ground in the overseas countries concerned.

“Where DfID (or other Government Department) is funding the carrying out of the overseas aid programme of the UK, HMRC consider there is no supply by the charity undertaking the overseas work for DfID, or procuring that work, because DfID does not receive any benefit that would make it a taxable supply by way of business. The carrying out of these overseas projects and the provision of consultancy services overseas to fulfil the UK’s international aid programme is therefore not a taxable supply for VAT purposes and nor is the funding consideration. If the underlying purpose is clearly to fulfil the UK’s international aid programme, it does not matter if the benefit is to an overseas Government directly or to overseas communities and institutions, for example the carrying out of an immunisation or healthcare programme on the ground. The important point is that the purpose is to fulfil the UK’s international aid obligations. The exact form of the agreement, i.e. whether it is expressed as a contract with measurable deliverables and remuneration does not affect this issue – what matters is the underlying analysis of the position, and its  direct connection with the  delivery of the UK’s overseas aid programme.

“As regards the position where the contract is expressed as being a sub contract with the main contractor, HMRC would accept that if the main contract with the Government Department is not taxable on the above argument, the sub contract to deliver the programme would not be either, provided it was demonstrably a ‘back-to-back contract’, i.e. like the main contract it was clearly for the delivery of the UK’s international aid programme on the ground. On this basis, back-to-back contracts between the humanitarian aid charity and a main contractor of the Government Department, and between such a charity and its own sister charity in the UK, would also be nonbusiness, i.e. they would share the same nonbusiness treatment as the main contract, and it follows that the receipt of the supply in the UK would also be outside the scope of VAT and would not be subject to the reverse charge”.