Thousands of business hope to make use of the various grant payments being made available by the Government and local authorities in response to the Coronavirus pandemic.
However, those in receipt of the new funding will need to make sure it is properly accounted for, which raises the question, how do you account for grant income?
The first and most important point to consider is whether the income really is a grant, or whether it is instead a loan or some other form of financing.
The simple definition is that grant income is income received by you or your company for which you do not have to provide anything in return.
Although you may be required to report your use of the grant or be limited in how it is spent, you will not have to make any form for repayment or reparation, such as the provision of goods or services.
If the grant is for expenditure that you would normally record in the profit and loss account, the grant income is reflected as income in your profit and loss account.
Where a grant relates to specific equipment or another fixed asset, the grant income is deferred and should be released to the profit and loss account to match with the depreciation of the grant purchased asset.
You’re meant to account for the income when it becomes receivable. In the case of the Small Business Grants Fund and the Retail, Hospitality and Leisure Grant Fund, this is the 20 March, not when the money is received. This may mean that those with March year-end accounts need to check how the income is reported.
As grants are generally considered to be a taxable form of income, they can be the taxed the same as any other forms of income, for limited companies this would be via Corporation Tax.
Where a grant is for expenditure that appears in your profit and loss account and you can defer the grant income, such as through the acquisition of a fixed asset, then you may not have a tax liability on the income as it will be matched with its intended expenditure (i.e. expenditure will cancel out income in your accounts).
In the case of the latest Government’s COVID-19 grants, it is most likely that you will have to pay Corporation Tax as they are not linked to the acquisition of an asset and cannot be deferred. It is therefore important that you account for this income accurately, so that you pay the correct amount of tax in future.
Grant income is outside the scope of VAT, therefore no VAT is payable when you receive a grant, but you may be able to reclaim VAT from any asset paid for via a grant, as long as it is within the ‘normal’ VAT rules.
Many businesses may not have used grant funding before and it is easy to make an error by either failing to record grants as income or misreporting the amount or timing of the receipt. This being the case, we recommend that businesses making use of the Government’s grant funding seek advice and support when preparing their accounts to ensure grant income is correctly reported.