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HMRC internal manual

Business Income Manual

Grant aided bodies: grants or donations

Is the body trading?

There are a variety of grant aided business support bodies ranging from local agencies, with a budget of a few thousand pounds contributed by local business concerns to, at the other extreme, large development, training and enterprise. The main purpose of these diverse concerns is the regeneration of business and employment in a particular locality. These objectives may be delivered in a variety of ways, for example:

  • training programmes for the young;
  • business advisory centres;
  • setting up small workshop at low rentals for the budding entrepreneur;
  • loosely knit co-operatives where there is an amalgam of small businesses, providing financial backing both to new businesses and ailing concerns;
  • the development of large factory estates.

It is not always easy to decide if any part of the activities undertaken by an entity amounts to carrying on a trade but, in general terms, trade implies the provision of goods or services to a customer for reward. You will need to examine the business accounts to establish the facts. In particular, you will need to identify and, if necessary, to isolate activities that are supported by paying customers. A business advisory centre that is wholly maintained by contributions from altruistic concerns or individuals would not be trading - there being no customer/supplier relationship. However where a public agency contracts with an entity to provide business advisory or other services then this will amount to a trade if the contract with the public agency is on a commercial basis. In such circumstances it is immaterial that those benefiting from the advice are not ‘paying customers’ of the provider - the customer is the public agency and the provider is the entity.

Development of factory estates

A more difficult problem arises with the development or conversion of buildings or the provision of the infrastructure of a factory estate. There may be a mixture of outright sales or the grant of leases. You may have to consider whether the need to provide incentives for the regeneration of employment over-rode commercial considerations. A large loss on the project may have been apparent from the outset and it may be that the loss did not arise in the ordinary course of trade. Similar considerations apply to losses arising on loans that have been made to support ailing companies, and again you should consider whether seemingly uncommercial transactions are by way of trade. The main object is to ensure that expenditure on non-trading activities is excluded.

Other income, and gains: taxable

Whether or not there is trading, all these concerns will be taxable under the normal rules in respect of any capital gains and income from interest, rents and the like. The exemption from Corporation Tax for local authorities does not apply to companies operated by local authorities.

Grant aided bodies that are trading: treatment of grants received

The taxation treatment of any grants received follows normal principles (see BIM40450 onwards). If a grant is applied towards the cost of plant for use in a trade the capital allowances available are restricted; see CA14100.

Where grants are applied towards the cost of assets that are within the capital gains provisions, you should consider the rule excluding expenditure reimbursed out of public money; see CG15291.