1. Grants and contracts made simple
Fleur Holden and Ross Palmer
16 September 2016

2. Agenda Types of agreement Classification of funding
Unrestricted
Restricted
Recognition of income
Presentation in the accounts
VAT and other tax issues
This is the agenda for our session this morning. You have a copy of our Grants and Contracts made simple publication as a hand out.
We also have a flow chart and 3 example funding agreements to look at at the end (this to a test to see if you have been listening)!

3. Types of agreement Contracts Grants Service level agreements
Consideration
Legally binding
Subject to contract law
Grants
Gift, freely given
Donor’s discretion
Subject to trust law
Service level agreements
Could be a grant or contract
Contracts – involve a consideration for a supply of services. There is a two-way transaction and a process of offer and acceptance. This forms a legally binding agreement (even if not in writing) so can sue in a court of law if terms are breached – formally documents responsibilities & expectations – all parties can refer to something of substance at anytime. In the event that the terms are breached, there may be damages to pay.
Grants – are a gift - freely given at the discretion of the donor. The donor may specify what the funding can be used for – a specific group of beneficiaries or a specific project, but the donor does not receive a direct supply in return for the grant. Grants are subject to trust law so in the event that the terms are breached, you have to repay the funding to the donor but there are no damages.
SLA – sets out services to be provided and may describe performance and standards expected. Can be used in context of grant funding or contract – not a legally recognised form in itself. It sets out what needs to be done & when.

4. Classification of funding
Unrestricted
To further charitable objects
Contracts
Can make a surplus
Restricted
Purpose of grant/donation restricted by donor
Narrower than charity’s objects
Unspent funds have to be offered back
Under the SORP, charities have to account for incoming and outgoing resources as restricted and unrestricted funds.
Unrestricted funds are funds the charity receives to further its objects. These can be donations or grants or fees earned.
Restricted funds have to be used for the purpose for which they were given, as specified by the donor.
Grants can be restricted or unrestricted. This will depend on the specifications of the donor and the objects of the charity.
Contracts are by nature not donations and therefore cannot be treated as restricted funds. Contract income should be treated as unrestricted income.
The charity has to meet the terms of the contract but does not have to spend all the funding to do so, so can make a surplus. Unspent funds on a contract are a surplus and can be retained as reserves.
Unspent restricted grants will be carried forward as a restricted funds and if not spent, should be repaid to the funder.

5. Accounting issues 1 Recognition of income
Tests for recognising all income
Entitlement
Probable
Measurement
Passing the recognition test for:
Grants
Contracts
The accounting treatment for grants is different to the treatment for contracts, mainly in terms of when the income is recognised.
Three tests for recognising income – entitlement, certainty and measurement.
For grants, the general rule is to recognise the income when received or receivable, whichever is earlier. So if you receive a grant in the year, it should be recognised in full. The exception is if the donor specifies that it is to be spent in a future accounting period, in which case it should be deferred.
But don’t just defer because you haven’t spent it all.
With contracts, you should recognise the income as earned, so as the contractual obligations have been fulfilled. This may not correspond to when the income is received.
If the income is received up front, you have to assess what proportion of the supply has been performed and recognise an equivalent proportion of the income. Additional income not earned should be deferred as a creditor on the balance sheet.
If income is received in arrears, you may have to accrue for income earned in the financial period based on performance. This will be a debtor on the balance sheet.

6. Accounting issues 2 Presentation in the accounts
Income from grants and donations
Income from charitable activities
The second accounting issue is where to present the income on the Statement of Financial Activities (SOFA).
The SOFA headings that are relevant here are voluntary income and incoming resources from charitable activities.
Contracts cannot be voluntary income so will always appear as incoming resources from charitable activities.
Grants may be in either category. They will be in voluntary income where they are not for a specific purpose, for example, to fund core costs. Where grants are for charitable activities they should be shown under these headings on the SOFA.

7. VAT and other tax issues
Grants
Usually outside the scope of VAT
No VAT recoverable on purchases
Contracts
Usually business activity
Maybe VATable or exempt
Can recover VAT on purchases if VATable
Is it primary purpose?
It does not matter what the funding agreement is called. What is relevant to the VAT treatment is the underlying nature of the transaction.
Grants are usually outside scope of vat. They are a one-way transaction with no direct supply in return for the funding, so not a business activity.
This means that VAT on purchases is not recoverable. So operationally, you need to cost a grant-funded service to include VAT on expenditure.
Contracts – are usually a business supply – so within the scope of vat. To be within the scope of VAT must have:
Direct link between the payment and the supply of service
Legal relationship between the parties involved
Consideration (payment) in return for the service
Case law on page 10 – Bowthorpe Community Trust and Wolverhampton CAB. In both these cases, the local authority funding had been thought to be a contract as a supply of services but were found to be a grant. This was because there was a service and consideration but not as a two-way transaction. There was a triangular arrangement of funding from the local authority that was used to provide services to the beneficiaries. The local authority was not found to be receiving a direct benefit for its consideration so not a vatable supply. In these cases, it meant the charities were unable to recover VAT on their costs.
Also watch out for funding that acts as a subsidy for a non-business activity - then not a real business supply.
Consider if the funder derives benefit from the supply – if it is sub-contracting a service that it would otherwise have to perform itself then there is a benefit. But if no requirement to provide that service then may not be a benefit.
Even where there is a business supply, many supplies that charities undertake are exempt from VAT. So no VAT charged but also blocks recovery of VAT on purchases. You can only recover the VAT on purchases where VAT has been charged on the income.
Then corporation tax… make sure services provided under contracts are in furtherance of the charity’s objects (primary purpose). Else use a trading subsidiary. May also use a trading sub to keep commercial activities out of the charity for risk management or for VAT planning.

8. Decisions Grants Contracts Existing service seeking funding
Indication of likely areas to benefit
Third party funds what beneficiaries receive
Grant is donation – with timing, amount and frequency at discretion of donor
Commissioned service
Specifies services to be provided
Direct link between service provided and recipient
Binding agreement
There are other differences too…
A service-level agreement (SLA) is a negotiated agreement between two parties where one is the customer and the other is the service provider. This can be a legally binding formal or informal 'contract‘. Contracts between the service provider and other third parties are often (incorrectly) called SLAs — as the level of service has been set by the (principal) customer there can be no 'agreement' between third parties (these agreements are simply a 'contract').
The SLA records a common understanding about services, priorities, responsibilities, guarantees and warranties. Each area of service scope should have the 'level of service' defined. The SLA may specify the levels of availability, serviceability, performance, operation, or other attributes of the service such as billing. The 'level of service' can also be specified as 'target' and 'minimum', which allows customers to be informed what to expect (the minimum), whilst providing a measurable (average) target value that shows the level of organization performance. In some contracts penalties may be agreed in the case of non compliance of the SLA (but see 'internal' customers below). It is important to note that the 'agreement' relates to the services the customer receives, and not how the service provider delivers that service.

9. Useful contact details & resources
Fleur Holden
Ross Palmer
Tel:
Related publications
Pricing made simple, Grants and Contracts made simple
Charities & Public Service Delivery
service-delivery-an-introduction-cc37
See flowchart and examples 9