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Are the Covid-19 Small Business Grants subject to VAT?

Posted on 13 May 2020 - News

Coronavirus

The Government support package for Covid-19 includes grants available to small businesses that are currently impacted by the Covid-19 pandemic.

Many businesses are therefore applying for these grants provided by the Government, via their local authorities. 

A question that has come to light surrounding these grant applications is what are the VAT implications and will the grants be subject to VAT?

The details of the grants that have been made available are on the Government website and for more information you can review these by clicking on the link below: 

https://www.gov.uk/government/publications/coronavirus-covid-19-business-support-grant-funding-guidance-for-businesses

HMRC have not provided guidance on the VAT implications in any of their announcements, however, the basic principles of supply and consideration can be expected to apply. VAT is a tax on supplies for consideration, so where a grant is made, and nothing is expected to be done in return, it will not be subject to VAT.

On this basis VAT does not need to be paid on the grant and the income does not need to be included in VAT returns.

In addition, for businesses that are not registered for VAT, this income does not count towards the VAT registration threshold.

HMRC’s approach is set out in the supply and consideration manual at VATSC06312 of which more information can be found by clicking on the link below:  

https://www.gov.uk/hmrc-internal-manuals/vat-supply-and-consideration/vatsc06312

Grant funding can prove a complex area in some cases, as sometimes funding bodies use the term grant when in reality it is payment for a contractual obligation. If a business is receiving what they understand to be a grant, they should always seek advice to check the position.

However, in the case of the business support funding being made available to mitigate the impact of Covid-19, as outlined, based on the longstanding principles of VAT, we would not expect that these grants would fall into this category and should be outside the scope of VAT.

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