What should I check before signing a grant agreement?

England and Wales: This page sets out the position in full. Scotland: the same position on VAT and on restricted funds, because VAT is UK-wide and the restricted-fund principle holds in Scots law too, though the Commission guidance quoted here is English. Scotland has its own procurement legislation, and this page does not cover it. Northern Ireland: the same position on VAT and on restricted funds; whether Northern Ireland’s procurement position is identical was not independently confirmed.

The one test a treasurer can apply: what happens to an underspend?

Most guidance on checking a grant agreement starts with VAT theory. Start instead with the underspend. Imagine the project comes in under budget, and ask whether the money left over is still tied to the purpose.

This page starts when an agreement is in front of you. You will have logged the offer when you tracked your applications and responded to funder questions.

If it is, you are almost certainly looking at a grant. If it is yours outright, because you did what was paid for, you are looking at a contract.

The Charity Commission’s guidance for England and Wales on public service delivery, CC37, puts the grant side this way, verbatim:

A grant is a gift or donation. The donor has no right to receive anything in return, but may attach terms and conditions specifying how the grant is to be spent, which could make it a restricted fund within the charity’s accounts. Spending the grant on anything else would be a breach of trust. Any surplus funds will be subject to the same restrictions unless the terms of the grant stipulate otherwise.

And the contract side, verbatim: “Any surplus under a contract is not a restricted fund, but might be subject to contractual terms and conditions.”

Note the word could. Conditions can make a grant a restricted fund; they do not do so automatically. Where they do, trust law binds the money whatever the agreement says. The next step then applies: set up restricted fund tracking for the award.

The answer to the surplus question decides two things at once:

• VAT. A genuine grant is outside the scope of VAT. A contract payment is consideration for a supply, which may be taxable. The business test itself is applied when you determine whether you must register for VAT.
• The restricted fund. A grant for a stated purpose can create one. A contract fee does not. The accounting is set out when you record your first restricted grant.

Does a clawback clause make it a contract?

No: a clawback clause points towards a grant, which is exactly backwards from what most people assume. A clause letting the funder take the money back looks like the strongest contractual right there is. So trustees reason that if the funder can take it back, it must be a contract.

HMRC reads it the other way. Its manual lists a clawback provision among the factors that indicate a grant. On the contract side it says, verbatim:

a contract for a supply should not contain a ‘clawback’ clause as there is no automatic right to reclaim any money. The money is consideration for the supply and the solution for reclaiming the payment in any subsequent breach of contract is to sue for damages.

A contract’s remedy for non-performance is damages. A grant’s normal remedy is repayment. So a clawback clause is evidence that you have a grant.

HMRC’s other grant indicators make a fast checklist. No single one decides it, and the more are present, the more likely the payment is a grant:

• the money followed an application process run by a body that regularly makes grants
• the funder is not itself the direct beneficiary of the work
• the funder does not control the spending beyond making sure it is properly managed
• the charity sets its own targets
• neither side treats the payment as trading income
• the money reimburses costs already incurred, or plugs a deficit, rather than paying in advance for a service
• the funder is using a statutory power to make grants

Conditions alone do not turn a grant into a contract either. HMRC’s VAT notice for charities says, verbatim: “Attaching conditions or safeguards to the payment of grants to make sure that the money is spent correctly does not turn it into consideration for a supply.” Monitoring and reporting requirements are normal in a grant.

Grant or contract: why the label does not decide it

A document headed “grant agreement” can still be a contract in substance. HMRC’s test asks whether there is a supply, a payment for it, and a direct link between the two. Suppose the funder specifies the service, controls how it is run and is itself the one who benefits. Then the payment looks like consideration for a supply, whatever the title page says.

Procurement follows the same logic. In England and Wales, the Procurement Act 2023 does not exempt grants by name.

Section 3(2) defines a public contract as a contract for the supply, “for pecuniary interest”, of goods, services or works to a contracting authority. A grant that asks for nothing back fails that definition, so it never becomes a public contract. The edge case is a so-called grant that in substance buys a specified service for the funder. It risks being treated as a contract, and the label will not save it.

Outside procurement law is not the same as outside competition. The Cabinet Office’s grants standard still expects government funders to compete grants by default and advertise them through Find a Grant. That is a policy expectation on the funder, not a duty on you.

What sets off the clawback clause?

A clawback clause is a term that lets the funder reclaim money it has already paid. Nearly every grant agreement has one, and the question is what sets it off.

Garfield Weston Foundation’s terms reserve the right to reclaim where the charity “does not meet the requirements”. Read literally, that is broad enough to catch a minor administrative slip. It reads as boilerplate, and that is why nobody queries it.

Query it. Two requests are reasonable and funders do grant them:

• materiality — the trigger bites only on a breach that matters
• a cure period — notice of the problem and a chance to put it right before any money is reclaimed

Look also at how the clause handles insolvency. Many agreements make repayment due on administration, receivership or liquidation. Ask how that interacts with the charity’s other creditors.

Operational clauses that make a grant heavier to run

The word “grant” suggests a gift with light strings. Read the operational clauses before assuming that. The table lists each one and what to check in it.

One absence is worth knowing. Neither of the two funders’ published terms read for this guide asks trustees for a personal guarantee. That is two funders, not a survey of the sector, so read your own agreement. If one does ask, stop and take advice.

Signing the grant agreement and minuting your queries

Take the agreement to the trustees, not only the person who wrote the bid. Record which clauses you queried, what you asked for and what the funder agreed. That minute is your evidence later that the board understood what it signed.

Check who is signing, and in what capacity. An unincorporated group cannot contract in its own name, so its committee members sign and carry the obligations personally. That exposure is covered when you check eligibility properly before writing anything.

With the agreement signed and the queries minuted, the next step is tracking. A grant for a stated purpose needs it before the first payment is spent.

Common mistake: assuming a clawback clause means it is a contract

It feels contractual — money back if you fail. HMRC treats it the other way round. A clawback provision is one of the factors that indicate a grant, because a contract’s remedy for breach is damages, not repayment.

Common mistake: signing without checking how broad the clawback trigger is

It reads as boilerplate. But Garfield Weston reserves a right to reclaim where the charity “does not meet the requirements”. That is wide enough to catch a minor administrative slip. Ask for materiality and a cure period before you sign.

Common mistake: treating a grant as administratively lighter than a contract

The word “grant” suggests a gift. The Heritage Fund requires competitive quotes and documented tender evidence above set figures in its programme guidance — procurement-style obligations inside a grant. Budget the staff time.

Worked example

Saltmarsh Trust is offered money by its local council. The letter calls it a grant. The terms specify the service, the opening hours and a performance standard, and the council will receive the monitoring reports itself.

The treasurer runs the surplus question first. Suppose Saltmarsh runs the service for less than the payment. The agreement says nothing about whether the difference stays tied to a purpose. There is no clawback clause, and the remedy for non-delivery is left to the general law.

Then the factor list. The council is the one who benefits. It controls delivery. It set the targets. Almost nothing on HMRC’s list points towards a grant.

The label does not decide it. This looks like payment for a service. That changes the VAT analysis, which the treasurer now takes to the VAT page. It also means any surplus is not a restricted fund. Saltmarsh minutes the conclusion, and before signing asks the council to confirm in writing how it sees the arrangement.