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INGOs: VAT implications for funding and grants

Robert Warne, Partner, Head of VAT
12/08/2020
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We have for some years now been ensuring that our clients are aware that, under a concession, there is a long-standing arrangement between HMRC and the Department for International Development (DFID). This means that contracts with overseas governments, paid for by DFID, are viewed under this concession as DFID procuring and paying for services provided to an overseas customer by UK suppliers. The supplies are treated as outside the scope of UK VAT and also allow VAT on associated costs to be recovered in full. These contracts have also enhanced charities’ overhead recovery on general expenditure as well.

Recent guidance issued by HMRC might impact your organisations, in particular charities who are involved with:

  • overseas aid grants
  • DFID projects
  • collaborative partnerships
  • reverse charge issues with overseas partners.

There has been much correspondence with HMRC in respect of the VAT treatment of humanitarian and associated funding, including DFID funding and UK Global Challenges Research Funding (GCRF).

HMRC officials have agreed that guidance will be updated in due course, but have agreed that the full correspondence can be published in the interim – access here.

The main findings are summarised below. HMRC cannot comment on all specific funding arrangements. However, charities who feel they are impacted or their queries are still not being answered should contact us at Crowe.

Government funding

UK overseas aid programme

All grant funding received from a UK government department in order to fund the carrying out of the UK’s overseas aid programme is a non-business activity, and therefore outside the scope of UK VAT - no charging of VAT and no recovery of input VAT.

This covers both DFID funding, but also other grants e.g. GCRF, and relates to both amounts receivable under Accountable Grant Arrangements (AGAs) and amounts receivable under service contracts.

DFID special arrangement

There are a number of tripartite arrangements under which DFID make payments to UK charities etc. on behalf of overseas governments; the underlying service agreement is with the overseas government but DFID agrees to settle the bill. This is described as a 'special arrangement' and has been covered by HMRC in the past. Where there is a supply to the overseas government, no VAT is chargeable by the charity because the supply is overseas i.e. an export. However, in these circumstances, input VAT can be reclaimed on these services.

DFID and HMRC have agreed that it is only the former department that can determine if supplies are being made in relation to these specific circumstances, and they will notify a contractor of the situation and the VAT treatment required.

Other non-UK governments and intergovernmental organisations

The normal guidance on grants applies. If, for example, a charity received an Irish Aid or EU grant income to fund a COVID-19 relief programme in Yemen under a pay by results service contract, which was agreed to give rise to a supply, then the charity would not need to charge any VAT because this is an outside the scope supply (i.e. an export), but input VAT is recoverable.

Back to back arrangements

Suppliers in back to back arrangements

HMRC guidance is not prescriptive about who the supplier should be, and is not limited to overseas aid charities. If the circumstances mirror those set out in paragraph six of VAT Information Sheet 11/13 (see guidance here), where a contract involves grant funding flowing through one body to others, and the arrangements are genuinely non-business, then HMRC accepts that all the services provided by each of the collaborating bodies are outside the scope of VAT.

Subsequent identification and contracting with collaborative partner

HMRC has confirmed that it is not necessary to have identified the collaborative partner when the main grant is entered into for the back to back relief to apply. If the arrangements are genuinely non-business activities, and the grant funding flows through a lead body to the others involved in the contract, then knowing the identities of the collaborators is not necessary at the time of the application. HMRC states:

For example: A government department funds some research for the common good. It funds body 'A', but other bodies are also involved. 'A' holds the funds and at the start of the research project it is known that bodies 'B' and 'C' will be involved. Subsequently, some of the research is also undertaken by 'D'. The collaborative research principle applies to 'D' as much as it applies to 'A', 'B' and 'C'. 

Reverse charge on payments of GCRF funding to overseas partners delivering the UK international aid program on the ground

Funding transferred from the recipients of GCRF, such as charities, to overseas partners is generally outside the scope. On this basis, there is no supply by the entity undertaking the work, or procuring the work, and therefore the funding is outside the scope of UK VAT. As such, it follows that no reverse charge in these circumstances would apply on payments made.

Grants, contracts and reverse charges are some of the more complex VAT areas that impact charities. If you would like further clarification on any of the information contained in the above alert, please contact Robert Warne, Naziar Hashemi or Pesh Framjee.

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Robert Warne
Rob Warne
Partner, Head of VAT and Customs Duty services
London