When is a grant not a grant?

Statutory sector funders are increasingly imposing grant funding agreements and contracts, with no scope for negotiation at all. This high -handed, take it or leave it approach can expose charities and social enterprises to a myriad of risks, including very high or non-existent limits on liabilities, loss of intellectual property rights and unilateral rights for the public authority to change or terminate the contract, often with little or no notice or scope for change in the amount of funding. For small organisations there’s often nothing you can do about this, but you should know what you are letting yourselves in for by spending a few hundred pounds to get legal or tax advice on the risks you will be facing.

One key risk to look out for when taking on funding from any source, and particularly from the public sector, is whether the form of agreement being imposed is a grant funding agreement or a contract. It’s increasingly difficult to tell the difference and it really does matter because it could cost you a lot of money further down the road if HMRC or the Courts rule that your grant was, in fact, a contract or vice versa.

Grant or contract?

For funding to be genuinely a grant, the money must be freely given and the funder must receive no direct benefit in return; in effect the grant is simply a subsidy for a service the provider may not otherwise be able to afford to provide. Importantly, grants are outside the scope of VAT (so, for example, you cannot recover VAT con costs associated with a grant).

In contrast, a contract is a deal between the parties whereby one (the funder) is buying a service from the other. Contracts will usually be subject to VAT (depending on the service being provided) and public procurement rules will apply. The problem is that restricted grants and service level agreements can look a lot like this as well.

If an agreement that purports to be a grant is, in fact, a contact, this may mean you can recover VAT on costs but it could also mean that some way down the road, HMRC seek to recover VAT on the income you received under the contract (and that can get expensive, particularly where the funding agreement included the common clause stating that all monies paid will be deemed to be inclusive of VAT, allowing no room for subsequent recovery of VAT from the public authority). Equally, If the public procurement rules apply because the arrangement is a contract, and those rules were not followed, you run the risk of the Courts forcing you to reimburse the funder long after you’ve spent the money.

HMRC are increasingly cracking down on contracts dressed up as grants (and grants dressed up as contracts) so they can recover more VAT revenues. Furthermore, the courts make their decisions on these matters based on the substance of the transaction, not on what the funder chooses to call it. Therefore, while it is important that agreements make it clear whether the funding is a grant or a contract, that choice needs to align with the reality of the transaction involved.

Some things to watch out for in funding agreements that could tip the balance include:

• If the funder requests that you use their name and logo in certain ways, this could constitute a VATable supply or non-charitable trading.

• If the agreement refers to raising invoices (rather than claiming or drawing down a grant), that is more “contract-like”.

• If clawback applies should the terms of the agreement not be complied with, then it is more likely to be a grant (under a contract, there should be no mention of clawback as the remedy for any breach is to sue for damages).

• If the agreement entitles the funder to retain any intellectual property developed with the funding, it is more likely to be a contract

• If the funder is obliged by law to ensure the services covered by the agreement are provided (e.g. under a statutory duty), it is more likely that the arrangement will be a contract.

• If there are lots of requirements for you to comply with language that seems inappropriate for a grant (such as “contractor”, “performance standards”, etc.) then it is more likely to be a contract.

In you aren’t sure or you have advice that says the funder is wrong, you should challenge the funder about the status of the funding (grant or contract). If, in the case of a grant funding agreement, they continue to insist it is a grant, even if you agree, you should try to have a new clause included to state that while the parties consider VAT does not apply, if HMRC decides otherwise, the funding will be deemed exclusive of VAT and you can submit a subsequent VAT-only invoice to recover the VAT from the funder. If the funder can recover VAT (and local authorities usually can), this should not be a problem for them. IN general you should try to avoid onerous VAT clauses in agreements that prevent recovery of vAT from the funder if HMRC deem VAT applies.

Overall, our advice that you should seek professional legal and or tax advice on any agreement that you aren’t sure about, or which has been imposed on you. If you’d like to discuss any of these issues further, please contact us at julian@almondtreeconsulting.co.uk