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HMRC internal manual

VAT Business/Non-Business Manual

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HM Revenue & Customs
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Specific issues: grant funded bodies

Some organisations get grants to support their activities. Grants are made by a number of bodies including central government, local government and the national lottery.

Although they are normally outside the scope, sometimes such payments are direct consideration for a supply or third party consideration for a supply. Guidance on this is given at VATSC Supply and consideration VATSC30000.

The receipt of outside the scope income does not automatically mean that an activity is not business or lead to apportionment of input tax. You should look at each grant-funded activity separately and apply the business test.

An activity is non-business if it:

  • involves the making of no taxable supplies for consideration; and
  • is entirely funded by outside the scope income.

No tax incurred on the costs of a non-business activity can be treated as input tax.

You should apply the business test if an activity involves:

  • the making of some taxable supplies; and
  • the receipt of some outside the scope income.

The receipt of money to act as a subsidy for a loss making commercial activity need not result in input tax restriction. However, in many cases when an organisation gets outside the scope income it shows that there is a non-business activity. When this happens an apportionment is needed.

Organisations may incur costs in applying for grants and other income that HMRC treats as being outside the scope of UK VAT. This is particularly true of applications for national lottery funding.

Tax incurred on the process of applying for such funds is input tax if the intended activity the money is being applied for is a business activity. If the activity is not business, for example if it involves the making of no supplies for consideration, the tax incurred on getting the funding is not input tax. It does not matter whether the grant application is successful or not.