Is it a grant or is it a contract?

16th June 2022

David Butler considers the intricacies of grant accounting and whether it really is a grant in the first place or should we be accounting for it as a contract.

In my last insight I covered the issue of grant accounting and its many foibles, which you can read here. This next insight considers some further intricacies of grant accounting, and then considers whether it really is a grant in the first place or should we be accounting for it as a contract.

In theory it should be very easy to decide between the two; a grant is non-exchange transaction, i.e. the grant giver is not getting anything in return; and a contract is an exchange transaction where one party receives consideration (typically money) in exchange for a service or good. So all very straight forward you would think…

Where things get more complicated is where a grant has performance criteria embedded within it. These criteria can make some grants feel like contracts as you are receiving additional funding in exchange for hitting a certain milestone or providing an agreed level of service. This can be a particular issue with Local Government funding. Often Local Authorities enter into subtly different arrangements with the same charity, and this further muddies the waters.

It would be extremely helpful if there were some hard and fast rules to enable us to determine whether income is from a grant or a contract – but life (and accounting) is never that straight forward. The table below highlights some of the key features of grants and contracts, but these are indicative rather than conclusive.

	Grant	Contract
What is received?	Money given by a donor	Consideration given - usually as cash but does not have to be.
What does the donor/contractor receive?	Nothing	Contractor receives goods or services in exchange for consideration.
What happens if you don’t spend all of the money?	If the money has been given for a specific reason, then it should be returned. If there is no restriction then unspent funds should be carried forward as unrestricted funds.	If the terms of the contact have been fulfilled, then any unspent funding is profit.
Is there VAT on the income?	No (donations or gifts are outside the scope for VAT purposes as nothing is given in return).	Yes – subject to the services being supplied.
Can the charity reclaim Gift Aid?	Yes – Gift Aid may be available if received from an individual.	No
Is the income restricted or unrestricted?	It depends. If the donor specifies certain purposes then it is restricted.	Unrestricted funds – in almost all cases contract income is unrestricted. The income is for the provision of a service and any profits can be spent as the Trustees wish, in line with their charitable objects.
What if the grant agreement does not specify on what the funds should be spent?	Income will be shown as unrestricted income and will be recognised when the income recognition criteria are met – which may be well in advance of the associated expenditure.	A contract will always require the provision of goods or services in return for consideration.
How is income classified in the accounts?	Voluntary income – donations	Income from charitable activities.

So the table above gives you some pointers to look out for to help you determine the nature of the income, but it does not help you conclude in all instances.

Where the position gets a little murkier is with Service Level Agreements (SLAs) and performance criteria. Many charities enter into SLAs with Local Authorities for the funding they receive. These will often specify a whole list of activities that need to be performed which make them seem very similar to a contract.

So how do you distinguish between the performance criteria set out in an SLA with the specification of a contract?

It comes down to the distinction of whether a service has been supplied. If the income provider has not received any benefit from the service performed by the charity, there has been no supply and so the income is a grant. In these instances, the SLA is merely a means for the donor to attach clear conditions to the grant.

An example would be an agreement with the Local Authority to plant trees. The LA want 1,000 trees planted to improve the local environment and they specify the number of trees to be planted in specific locations. The LA does not itself benefit from the tree planting but is doing it to improve the quality of life of its residents. These performance criteria can have a significant impact on the income recognition, but it is still grant income.

However, if the National Government introduced a law compelling Local Authorities to plant trees, then a legal obligation is created. In this instance asking a charity to plant 1000 trees would be a contract as the Local Authority is getting an indirect benefit from not having to provide the service itself. The work done could be identical to the first instance but the legal obligation changes the outcome.

In conclusion, trying to identify if there has been a supply is the best way to work out if you have a grant or a contract, but in some cases this can take a lot of thought and judgement. The subtleties can also have a significant impact on the VAT treatment, but I will leave this guidance to the experts.

Contact David Butler

Visit our Charity and Not for Profit Knowledge Hub