It is important that charities understand the VAT implications of their various funding arrangements to ensure that output VAT is declared where necessary and input VAT recovered where possible. Grant funding – a freely-given payment in return for which no specific services (or goods) are provided by the charity – is outside the scope of VAT. However, it is sometimes the case that payments are described as grants but are, in reality, payments for supplies on which VAT at the standard rate may be chargeable.

Alternatively, the supplies in question may fall within a VAT exemption, and although there is no requirement to account for output VAT, the charity’s input tax recovery may be affected. Failing to identify that a payment is consideration for a supply of goods or services can result in an under-declaration of output tax or over-claiming input tax.