The Complete Guide to Accounting for Grant Income

As demand for rapid digital transformation continues across every industry, companies are increasingly searching for different forms of financial support. In any environment, finding the budgetary resource required to implement new technology and business chances can be complex. This is particularly true in a world of economic uncertainty.

Grants are perhaps one of the most valuable tools business leaders can use to achieve their transformational goals, in a way that’s interest-free, and flexible. However, while grant income can have many benefits, it can also occasionally present it’s own challenges.

Complex application processes aren’t the only issue companies need to think about when seeking grant support. They also need to figure out how to account for grant income in a way that maintains compliance with the tax authorities. Fortunately, here at UCAdvisor, we’re committed to making our Transformation Grant as easy, and accessible as possible for our clients.

Not only do we strive to make the application process streamlined and convenient, but we’re also here to guide you through the process of managing grant income from an accounting perspective.

Accounting for Grant Income: An Introduction

A grant is any financial reward issued to your company which does not require you to provide anything in return. Grant income can take the form of private and government grants, and it can apply to almost any sum of money, used for any purpose. The key defining factor is that a grant isn’t offered in exchange for goods or services.

The UCAdvisor Transformation Grant, for instance, is a no-strings-attached form of funding, delivered for free, to any client who engages our services when purchasing solutions from one of our approved partners. We do not require you to pay this money back, or pay any interest on it. You’re also not required to do anything in exchange for the grant, except reach out to us when you’ve chosen the provider you want to purchase solutions from.

For many, the concept of grant income can be confusing. “Free money” is something many businesses rarely encounter, after all. Many companies wonder how organisations can afford to give money away, and assume there must be some “catch” hidden in the process.

At UCAdvisor, we’re completely transparent about how our grant process works. Our transformation fund is powered by commissions gathered from the UK channel partner network. We save a portion of the commissions we receive, and bundle it into free payments for our clients. It’s that simple.

The Transformation fund from UCAdvisor has no limiting factors which dictate how it can be spent. Our clients have used the money for everything from charitable donations, to paying for new technology, and dealing with early exit fees. There’s also no upper limit on the funding our customers can receive. The exact amount of funding provided is tied to the contract you sign with your chosen vendor. When you engage us, after choosing a vendor from our partner network, we’ll provide an insight into any exact amounts of funding you can access, before you sign the final documents.

How to Account for Grant Income

Just like many forms of finance accessed in the business world, grant income needs to be accurately recorded and details must be shared with the relevant tax authorities. Grants have their own specific rules to consider when you’re managing your taxes. The exact way you account for grant income will depend on how you’re planning on using the funding.

For instance, if you’re planning on using the UCAdvisor Transformation fund for expenditure you’d usually include on your profit and loss (P&L) account, it will be recorded simply as income. This means you will pay tax on the money you receive in the same way you would any other income.

One option many companies use to reduce their tax expenses connected to grant income, is to defer the payments. Deferred income is listed on the balance sheet as a liability, until the company receiving the grant income also incurs expenses, which the grant can be used to cover. If you’re planning on using your funding for a specific expenditure in the future, deferring your grant income can allow you to release it into the profit and loss account at the most relevant time.

Deferring grant income essentially allows you to balance your profit and loss account, ensuring everything matches accordingly when tax season arises. This strategy can also be used if you’re planning on spending your funding on any equipment or fixed assets. The funding can simply be deferred and released to the P&L account to match with the depreciation of the asset purchased with the grant money.

Is Grant Income Taxable?

Although grant income isn’t the same as regular income (as you’re not providing anything in return for the money), it is still taxable in the United Kingdom. This means the UCAdvisor transformation fund will still be treated as taxable income once you receive it.
As mentioned above, the easiest way to reduce your tax liability, is to consider deferring the payment. If you plan on using the funding for expenditure set to appear in your profit and loss account, deferring the income will mean there will be no tax liability to address.

This is because the income will be matched to your intended expenditure. The income you receive (profit), and the money you spend (losses) will cancel each other out. The result should be that there are no changes to your profit or tax figures.

Companies planning on spending the funding on equipment using the above method will be able to eliminate their tax liability. However, you will not be able to claim any capital allowance on the equipment expenditure. If you’re unsure about the best method for you, speak to your accountant.

Do Companies Pay VAT on Grant Income?

If you’re a VAT registered company in the UK, you may be wondering whether you need to pay VAT, or whether you can claim any VAT back on the items you purchase with your Transformation Grant. While grant income is classified as taxable income by the UK regulatory authorities, it sits outside of the scope of VAT.

This means you should not have to pay any VAT on the money you receive whatsoever (provided you are receiving an officially recognised grant, like the Transformation Fund).

However, it’s worth noting you can still reclaim VAT from any asset you pay for when using your transformation fund as part of your digital transformation project. Any purchase you make will be treated as a separate expenditure, which means it falls under the standard VAT rules for purchases.
Keep in mind, some purchases will not require any VAT payments, so you’ll need to carefully examine your VAT costs to determine what kind of money you can reclaim. It may be worth speaking to your VAT or accounting expert if you’re unsure about what you can claim.

Recording a Grant Payment in Accounting Software

Since the “Making Tax Digital” initiative was introduced, the majority of businesses throughout the UK have begun using accountancy software to prepare their tax reports, and monitor expenses. If you’re working with an accounting professional to manage your taxes, you can pass your grant details, and any information related to deferred statements over to them.

However, it’s also possible to simply enter grant payment information into your accountancy software yourself, with relatively few steps. All you need to do is:
• Open your Chart of Accounts (this should be included in most accounting software options, but you can speak to your accounting provider or software provider if you’re unsure).
• Create a new Account type (Usually, this will mean choosing an “account type” option on your software, and selecting “other income”).
• Name your account “Transformation Grant”, or another name you can easily remember.
• Enter the appropriate information for the account (such as the amount of money received).
• Change the tax code to “No VAT”.
You can then reconcile the funding with the account within your software when it is released.

Accounting for the UCAdvisor Transformation Fund

Accounting for grant funding can seem like a complex process at first. Although most companies won’t view grants as “income”, as they don’t require the exchange of any goods or services, they’re still classed as income in the eyes of the regulatory authorities (at least in the UK).

With this in mind, it’s important to ensure you’re recording your Transformation Fund income correctly. Creating an account type for your Transformation Fund in your accountancy software should make it relatively easy to keep track of the funding, and determine exactly how it needs to be addressed in terms of taxes on your profits and losses.

For the most part, if you can defer your income for future expenses, then you should be able to eliminate most of, if not all of your tax liability. You also won’t need to pay any VAT on your grant either, so you should have more money to spend on your business goals.

Need any more help understanding the Transformation Fund? Contact UCAdvisor today and we’ll do our best to answer your questions.