Grant

Grants and contracts both bring money in, and charities often use the words interchangeably. The law does not. A grant supports an activity the charity was going to do anyway; a contract buys a service the funder wants delivered. What matters is the substance of the arrangement, not the word on the front of the document.

The distinction turns on whether there is a supply for consideration: if the funder receives something in return, the payment is likely consideration for a supply and may be within the scope of VAT. Grant income normally sits outside VAT because nothing is supplied back to the funder. Get this wrong and a charity can find itself with an unexpected VAT liability on money it treated as a donation.

Grant money almost always arrives as a restricted fund, which must be tracked separately and spent only on the funded purpose. Before you apply, read the grant-versus-contract test; before you spend, set up restricted fund tracking.