I attended a lecture around 20 years ago by Professor Ben Terra, an academic whose life was dedicated to the theory and practice of VAT, where he said (if my memory is not deceiving me) that ‘grants’ as such did not exist, as these were always payment for services, and were thus ‘consideration’. But he seemed resigned to the view that this was not how the world saw it.
But how does the world see it? And how can we know whether a payment from a public body, or foundation, is to be regarded as a payment ‘for’ services or simply as a gift? This is an issue with which charity accountants have wrestled for years, since they wish to reflect a difference between ‘earned income’ and grants. It is not as simple as saying that grants come without strings attached and can be spent as the recipient sees fit. Far from it, since many grants are ‘restricted’ and can only defray the costs of certain specified activities. Grant agreements are hedged around with conditions to prove they have been well spent. So, what is the difference between grant and consideration for services?
At one level, it is deceptively simple. Consideration for a supply arises if the resulting benefits are provided to the funder (rather than for society, say) and for the payment (rather than there merely being a circumstantial link). What could be simpler (leaving aside the category, to which I will come, which works contrary to this theory)? This hides a problem, though: how do you judge which situation pertains? What are we looking out for, and how do we deal with marginal, contradictory and ever-changing situations?
For more than 20 years (since before Professor Terra’s utterance), HMRC has left accountants and VAT consultants to work it out for themselves and has refrained from getting involved (unless there was tax to collect from a charity or funder). Its guidance was vestigial, and little better than saying ‘a grant is whatever is not consideration’. But in January 2018, it unveiled a policy in its VAT Supply and Consideration Manual at VATSC51600–VATSC51900. This consists of a few pages of scene setting (which emphasises the basic principle given above). It then dives into the detail of indicators of where public body funding looks to be a grant; and where, on the contrary, it looks to be consideration for a supply. It also scotches some false indicators that have been used occasionally to make a case for one or other treatment, but which do not point in either direction.
To these few useful pages, HMRC has attached lengthy case commentaries that only the hardy will choose to read, but will no doubt be useful in specific cases.
The tests it puts forward appear balanced, on the whole, and, depending how HMRC interprets its own guidance, they could well reduce the amount of time non-profits will be required to spend trying to analyse where they stand on such issues. The guidance is focused on public body funding and so skirts around issues arising from charity foundation funding, and perhaps that is something for another day.
But I ought to revert to the exception to my simple encapsulation of the principle. I said that there was no ‘consideration’ unless the supply is to the funder. That is not true of a subsidy provided for a specific service to specific people. This ‘subsidy’ principle is enshrined in the VAT Directive (and was perhaps what Professor Terra was thinking of). But it is very tricky to draw the line between a general ‘subsidy’ of wider activity (outside the scope) and a targeted subsidy of a specific supply to a third party. HMRC deals valiantly with that, but there is a lot of room for disputes to arise.
Of course, HMRC can only interpret the law as it is, and is not in the business of creating tax policy. How good it would be if a charity and local authority, say, could jointly elect to treat funding as consideration for a taxable supply and thus remove uncertainty. Or, say, a foundation could fund charity work, retain an interest in any possible future profits if such might be caused by the outcome of the grant made, and for this to be capable of being declared ‘de minimis’ or given a small value for VAT purposes, without all the hassle of split donation and fee contracts. That would be a brave new world, but it is not one that HMRC can deliver under current VAT policy.
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VAT and charity funding classification
Help at last from HMRC.
I attended a lecture around 20 years ago by Professor Ben Terra, an academic whose life was dedicated to the theory and practice of VAT, where he said (if my memory is not deceiving me) that ‘grants’ as such did not exist, as these were always payment for services, and were thus ‘consideration’. But he seemed resigned to the view that this was not how the world saw it.
But how does the world see it? And how can we know whether a payment from a public body, or foundation, is to be regarded as a payment ‘for’ services or simply as a gift? This is an issue with which charity accountants have wrestled for years, since they wish to reflect a difference between ‘earned income’ and grants. It is not as simple as saying that grants come without strings attached and can be spent as the recipient sees fit. Far from it, since many grants are ‘restricted’ and can only defray the costs of certain specified activities. Grant agreements are hedged around with conditions to prove they have been well spent. So, what is the difference between grant and consideration for services?
At one level, it is deceptively simple. Consideration for a supply arises if the resulting benefits are provided to the funder (rather than for society, say) and for the payment (rather than there merely being a circumstantial link). What could be simpler (leaving aside the category, to which I will come, which works contrary to this theory)? This hides a problem, though: how do you judge which situation pertains? What are we looking out for, and how do we deal with marginal, contradictory and ever-changing situations?
For more than 20 years (since before Professor Terra’s utterance), HMRC has left accountants and VAT consultants to work it out for themselves and has refrained from getting involved (unless there was tax to collect from a charity or funder). Its guidance was vestigial, and little better than saying ‘a grant is whatever is not consideration’. But in January 2018, it unveiled a policy in its VAT Supply and Consideration Manual at VATSC51600–VATSC51900. This consists of a few pages of scene setting (which emphasises the basic principle given above). It then dives into the detail of indicators of where public body funding looks to be a grant; and where, on the contrary, it looks to be consideration for a supply. It also scotches some false indicators that have been used occasionally to make a case for one or other treatment, but which do not point in either direction.
To these few useful pages, HMRC has attached lengthy case commentaries that only the hardy will choose to read, but will no doubt be useful in specific cases.
The tests it puts forward appear balanced, on the whole, and, depending how HMRC interprets its own guidance, they could well reduce the amount of time non-profits will be required to spend trying to analyse where they stand on such issues. The guidance is focused on public body funding and so skirts around issues arising from charity foundation funding, and perhaps that is something for another day.
But I ought to revert to the exception to my simple encapsulation of the principle. I said that there was no ‘consideration’ unless the supply is to the funder. That is not true of a subsidy provided for a specific service to specific people. This ‘subsidy’ principle is enshrined in the VAT Directive (and was perhaps what Professor Terra was thinking of). But it is very tricky to draw the line between a general ‘subsidy’ of wider activity (outside the scope) and a targeted subsidy of a specific supply to a third party. HMRC deals valiantly with that, but there is a lot of room for disputes to arise.
Of course, HMRC can only interpret the law as it is, and is not in the business of creating tax policy. How good it would be if a charity and local authority, say, could jointly elect to treat funding as consideration for a taxable supply and thus remove uncertainty. Or, say, a foundation could fund charity work, retain an interest in any possible future profits if such might be caused by the outcome of the grant made, and for this to be capable of being declared ‘de minimis’ or given a small value for VAT purposes, without all the hassle of split donation and fee contracts. That would be a brave new world, but it is not one that HMRC can deliver under current VAT policy.
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