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Grant income - is it vatable?

Client given grant for capex

Hi all

I have a client who has received a substantial grant from the local council to pay for the flooring in a refurbished building.

Client needed to change the floor to be suitable for his business. He took over an empty premises which the council had refurbished in part. He pays rent and rates as normal.

Question is should the grant be treated as a vatable supply? He's claimed VAT back on the cost of the flooring (agreed by HMRC). Income is in the following quarter.

I'd like to get it right as he's likely to get an inspection visit - 2 quarters since opening both with substantial reclaims.



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23rd Aug 2017 10:51

The question to be asked is whether there is a 'direct link' between the receiving of the grant money and the supplying of any goods or services to local council.
You will need to review correspondence and contracts to determine this.
Presumably HMRC have agreed that he can claim input tax as he will make taxable supplies. But were they aware of the potential non-business income to fund it?

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23rd Aug 2017 11:25

Are the Council also his landlords as you indicate the Council partially refurbished the building?

Does he pay rent to the Council?

If so what does the lease say re any capital payment from landlord to tenant i.e. is the payment actually a grant, what does the paperwork say?

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23rd Aug 2017 11:57

I agree with DJKL’s view – this need digging in, seems capital contribution rather than grant?

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23rd Aug 2017 11:58


Thanks to you both.

I'm waiting to see paperwork.

Les - he won't in all probability be supplying anything to the council (apart from the floor!)
HMRC won't be aware of non-business income for funding.

DJKL - yes council are landlords.

Lease terms per flooring costs - the council specified the flooring requirements and construction

'To install flooring in accordance with the Specification contained in the 3rd Schedule
and obtain 3 quotes to demonstrate the expenditure the Council will fund against the
lowest quote and the Council’s contribution will be a maximum £10,000'

So no mention of VAT or grant in the paperwork. The council employee dealing with it is adamant it's VAT free but I'd prefer at least one more insight!

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to Chris Ash
23rd Aug 2017 12:27

If the contribution is per the lease, is the rent subject to vat (has there been an option to tax)

To me it has all the hallmarks of a reverse premium.

Edit -I should add that given the tenant is fitting the floor, not a "normal" activity of a tenant, then the supply of works from tenant to landlord appears to be a vatable supply, irrespective of option to tax. The key then is the agreement within the lease re landlord reimbursuing, and whether the £10,000 is inc vat or plus vat.

Often leases will deal with vat issues not at the actual clause in question but in definitions etc (well ours often do) so you may need to carefully read whole lease.

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23rd Aug 2017 13:34


Council is landlord and rent is vatable.

I'm of the opinion given what I currently know that it's a vatable supply to the council.

Lease makes no mention of VAT apart from that it applies at current rate on payments made by the tenant to the council.

Waiting for the council to provide their view.

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23rd Aug 2017 14:18


Thanks for views.

I now have council's paperwork confirming that the money is a grant net of VAT. There is a separate set of paperwork for it.

Maybe the references to it should be outside the lease?

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