Donations and grants – VAT treatment
Donation and grant income is not consideration for a supply and is a non-business activity that falls outside the scope of VAT. This is because this income is freely given with no strings attached and is treated by the charity as a gift. A grant or donation can have certain conditions attached to it as to what it can be used for; but the conditions do not necessarily make it consideration for a supply because nothing specific is being provided to the funder in return for the payments. For more information charities should read HMRC Manual VATSC50400.
*NEW*: After a long period of development, HMRC has published updated replacement guidance on the VAT treatment of grants and contracts (in particular the section on Payments that are not Consideration: Grants). CTG’s VAT Expert Group was invited to comment on a draft of the guidance and overall we feel it is an improvement, particularly the sections on indicators of the supply position and related factors to help determine whether the payment is consideration for a supply or not. Sections of the Charity Tax Map online will also be updated in due course. We recommend that members also read Graham Elliott’s detailed commentary on the new guidance here.
If the charity merely acknowledges the gift then that does not make it business income. However, if the funder requires that specific deliverables be provided in return for the funding then that generally constitutes a consideration for supply and therefore makes the payments subject to VAT. Charities should always consider the substance of the arrangements and determine whether or not there is a supply being made in the course of business. This can be a difficult question of judgement, often involving a significant exposure to VAT; and it is likely that the use of professional advice will be required in many cases.
VAT incurred on expenditure that relates to funds raised for restricted charitable non-business purposes is not recoverable. However, where a charity which has non-business and business activities incurs VAT on fundraising costs and the funds raised support various activities of the charity, the VAT incurred will be recoverable to the extent that the funds raised support taxable business supplies. In practice, this means that VAT incurred on fundraising costs must be subject to a business/non-business apportionment to determine how much of the VAT incurred may be treated as input tax. The input tax will then be recoverable subject to the partial exemption rules.
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