Many of the measures announced by the government to help businesses during the Covid-19 (Coronavirus) pandemic involve grant payments to business owners. But how do you account for grant payments, and what taxes are due? It is important to understand the accounting treatment needed, and indeed whether income is actually a grant, be that from the government or private entity. Our short guide tells all.

What is a grant?

The mere labeling of a payment as a grant does not necessarily make it one. True grant income is money received by your business for which you do not have to provide or do anything in return. There may be restrictions in terms of what you can spend the money on, and/or a reporting requirement, but as long as you do not have to provide any goods or services in return for the grant, it is still classed as a grant.
In the context of the business support measures put in place for Coronavirus, the following schemes include payments by government grant:

  • Job Retention Scheme
  • Self Employed income support scheme
  • Cash grants for retail, hospitality and leisure businesses
  • Small Business Grant Scheme

You can find out more about all of these schemes but reading our guide to Coronavirus business support measures here.

Corporation tax and income tax on grant income

Grants are seen as taxable income in the same way as any other income. However, if the grant is for expenditure accounted for in the P&L and you can defer the grant income then the income can be matched to its intended expenditure. The income and expenditure cancel each other out and there would be no tax liability with no impact on your profit or tax.
If the grant income is spent on equipment or fixed assets then the grant is not taxable but there would also be no capital allowance available on the expenditure.

Accounting for grant income

How grant income is accounted for depends on what it is used for:
If the expenditure is usually accounted for in the P&L, then the grant income should be reflected there too. If you’ve yet to spend the grant it will be recorded on the balance sheet as deferred and moved to the P&L when the grant is spent.
If the grant is used to purchase equipment or other fixed assets then the grant income would be recorded on the balance sheet as deferred and released to the P&L over time to match depreciation of the item purchased.

VAT on grant income

Grant income is outside the scope of VAT, therefore no VAT is payable when you receive a grant.

If you need more information about the business support measure put in place to help businesses affected by Coronavirus, please read our guide here.

If you’d like to find out more about our accounting services here at Stilwell Gray please click here.