The assumption underlying a contract is that the recipient is a viable and self-sustaining organisation: the contract is a mutual bargain involving reciprocal obligations. By contrast, a grant funder is subsidising a service it considers necessary, but that the recipient does not otherwise have the resources to deliver on a self-sustaining basis at the standard required. The funder receives nothing in return and, unless the grant agreement is a deed, is under no obligation to pay.
Crucially, a grant may be eligible for Gift Aid and is outside the scope of VAT. Contract payments may be subject to VAT and are not eligible for Gift Aid. European Union rules on public procurement also apply to contracts.
Often it will be obvious whether funds are being offered in the form of a grant or a contract, but there is a grey area between the two. This is because restricted grants and service-level agreements can sometimes operate in a similar way.
For example, a local authority could give a grant to a childcare provider to enable it to provide a certain number of subsidised childcare places. Alternatively, the local authority could contract with the service provider to purchase a certain number of childcare places on behalf of users of the service. It is important to ensure that local authority funding agreements make it clear whether the arrangement is a grant or a contract and that they do not use ambiguous language.
Careful drafting of documents is the key to this. For example, clawback is the mechanism used by funders to reclaim funding if the terms of a grant are not complied with. A contractual agreement should make no mention of clawback: the funder's remedy for any breach of contract is to sue for damages.
- Thea Longley is a partner at Bates Wells & Braithwaite