VAT tribunal rules that payments to charity are taxable contracts, not grants

Peter Jenkins, VAT adviser to the Charity Tax Group, says the distinction between contracts and grants is not clearly defined

Peter Jenkins
Peter Jenkins

A charity has been told by a VAT tribunal that a number of payments it received from public sector bodies are contracts rather than grants, and that it must pay VAT on them.

Hope in the Community, a Kent-based umbrella body for religious organisations, received funding through several grant schemes, but was told by HM Revenue & Customs that, under its rules, the agreements were contracts.

Charities do not have to pay VAT on grants, but must do so on contracts. However, VAT on a contract can be charged to the contractor, which can usually reclaim the VAT if it is a public sector body.

Hope in the Community paid VAT on the contracts, but later applied to HMRC for two repayments totalling about £43,000. HMRC refused to pay, and Hope in the Community appealed to the VAT tribunal.

The VAT tribunal rejected their claim and said in its ruling that there was not enough evidence to support their view that the payments were grants. The value of the contracts is not specified in the ruling.

Peter Jenkins, an adviser on VAT to the Charity Tax Group, said the factors defining whether an agreement was a grant or a contract were not precisely defined, but principally concerned whether one body was directly providing a "supply of goods or services in exchange for a consideration", and that the case brought by Hope in the Community was not strong enough.

"This is a very complex area where you need to think carefully if you are a charity," he said. "In this case it seems that the charity was providing quite clearly defined services, so there is evidence to support HMRC’s view that this was a contract.

"Since the burden of proof in this case was on the charity, this was a difficult case to win."

Andrea Sofield, a partner in the indirect tax team at the accountancy firm Grant Thornton, said that the case added clarity to the distinction between a grant and a contract.

"The main theme seems to be that if you are seeking funding for your own project, that funding is likely to be seen as a grant," she said. "If someone else has paid you to carry out their project, even if it’s in line with your own objectives, it’s a contract."

She said that, in practice, whether something was called a grant or a contract by a local authority was based more on which budget the money was coming from.

"Unfortunately, whether you call something a grant or a contract doesn’t have much bearing on what it is for tax purposes," she said.

Nobody from Hope in the Community was available for comment.

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