Accounting for VAT on Grant Income

What is a Grant?

A grant is a sum of money given by a government body, charity, or other organisation to support a business or project. Unlike a payment for goods or services, grants are usually given without the expectation of receiving something in return.

Is VAT applicable on Grant Income?

Grants are typically outside the scope of VAT, unless the grant is linked to a supply of goods or services. When you see a client receiving a grant you must assess whether the grant is:

• A true grant – The overall strategy is to support good causes rather than a benefit from services (non-business income) → No VAT (Excluded from Box 6 of VAT Returns)
• A payment for a supply (business income) → VAT may be due

How to assess:

• Is something being supplied in return for the grant? → Likely a supply → VAT applies
• Is the funder receiving a benefit (reporting, promotion, data)? → VAT likely applies
• Are there performance obligations tied to payment? → VAT may apply
• Is it a donation or subsidy with no conditions? → Likely outside scope

How to account for Grant Income

If the Grant Is Outside the Scope of VAT – No VAT applies

Journal entry: DR Bank, CR Grant Income (Other Income or Donations)

VAT Code: Use “No VAT”

Do not include in VAT return

If the Grant Is a Payment for a Supply – VAT at 20% (but check specifics)

Journal entry: DR Bank, CR Income (Sales or Service), CR VAT

VAT Code: 20% VAT on Income

Include in VAT return (Boxes 1 and 6)

Steps to take when a Grant Income is received

• Ask the client for a copy of the Grant Agreement: Look for deliverables, milestones, or obligations.
• Enquire whether the client has to provide an IAR (Independent Accountants Report) on the grant. If so, this may indicate that this is a service, and VAT should be payable on the Grant.

Useful Tips

• Create a separate income account for grant income in the chart of accounts.
• Save a copy of the grant agreement in Dropbox.
• Check VAT implications before preparing VAT returns – if you are unsure consult with the Central team, and they will seek advice from a VAT specialist, if required.