Last updated: 14 October 2026
Do you pay VAT on a business grant, such as the Covid-19 grants?
No. Government grants, including the Covid-19 business support grants paid in 2020 to 2022, were outside the scope of VAT, because they weren’t payment for any goods or services you supplied. The same applies to most grants today. VAT only becomes relevant if the “grant” is really payment for a specific service you provide to the funder, in which case it’s taxable consideration. Grants are still taxable income for income tax or corporation tax.
Grants vs payments for services
| Type of funding | VAT treatment |
| Covid-19 business support grants (Small Business Grant Fund, Retail and Hospitality grants, Restart grants) | Outside the scope |
| Coronavirus Job Retention Scheme (furlough) payments | Outside the scope |
| Local authority or charity grants with no specific output required | Outside the scope |
| Funding where you must deliver specific services to the funder | Taxable, at the rate that applies to the service |
| Sponsorship where the sponsor gets advertising | Taxable |
The key question is whether the funder receives something in return. If you’re simply required to use the money for a purpose, such as staying open, it’s a grant.
Input tax on costs funded by grants
If a grant funds your normal taxable business activity, you can usually reclaim VAT on the costs as normal. If it funds non-business activity, such as free public events by a charity, the VAT on those costs may not be recoverable.
Income tax and corporation tax
Although grants are outside the scope of VAT, they are usually taxable income:
- Covid-19 business grants had to be reported on the 2020/21 or 2021/22 Self Assessment return or company tax return
- Furlough grants were taxable and the wages paid were deductible
- Capital grants can reduce the cost of assets for capital allowances
Example
A café received a £10,000 Restart grant in 2021. No VAT was due on the grant. The café included it as income in its accounts and paid corporation tax on its profit. It continued to reclaim VAT on its supplies as normal, because the grant supported its taxable business.
If HMRC checks old grants
HMRC has continued to review whether Covid-19 grants were claimed correctly. If a grant was overclaimed or not reported as income, correct it as soon as possible to limit penalties.
Practical tips
- Keep grant offer letters and terms
- Record grants separately in your bookkeeping
- Don’t show grants in box 6 of the VAT return
- Ask whether any conditions turn the payment into a service
Grants and the flat rate scheme
If you use the flat rate scheme, grants outside the scope are not included in your flat rate turnover, so they don’t increase the VAT you pay. The same applies to insurance payouts that aren’t for a supply.
Frequently asked questions
Did furlough payments affect VAT?
No, they were outside the scope.
Do I include grants on my VAT return?
No, grants outside the scope are not included in box 6.
Is an R&D grant subject to VAT?
Usually not, unless the funder gets the results as a service.
Can a grant be repayable?
Yes, if you break the conditions.
Related: VAT on payments that aren’t for supplies and corporation tax.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with VAT on grants and funding. See our VAT accountants service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 14 October 2026. It is not personal advice, so speak to an accountant about your own situation.
