A grant feels like income the moment it lands in the bank. Accounting standards disagree: what matters is what the grant was given for and whether its conditions have been met. Getting this wrong can inflate one year’s profit, understate the next, and leave a clawback risk invisible on the balance sheet.
Revenue grants and capital grants
- Revenue grants contribute to running costs: wages of an apprentice, a marketing campaign, a research project’s staff costs.
- Capital grants contribute to buying an asset: a machine, a building improvement, energy-efficient equipment.
Give each its own account so they can be presented and taxed correctly:
| Account | Type |
|---|---|
| Grant income – revenue | Other operating income |
| Grant income – release of capital grants | Other operating income |
| Deferred grant income | Liability (split between due within and after one year) |
| Grants receivable | Current asset |
Two models under FRS 102
FRS 102 section 24 lets an entity choose, class by class, between two models.
The performance model recognises a grant when its performance conditions are met. A grant with no future conditions is income when it becomes receivable; one that requires, say, 20 jobs to be created is income only once they exist. Money received before the conditions are met is a liability.
The accrual model spreads the grant over the periods in which the related costs are recognised. Revenue grants match the expenses they fund; capital grants are released over the useful life of the asset. Micro-entities using FRS 105 must use the accrual model.
Under either model a capital grant is not deducted from the cost of the asset: the asset is recorded at full cost and the grant sits separately as deferred income.
Worked example: a capital grant under the accrual model
A manufacturer buys a £60,000 machine with a five-year life and receives a £15,000 grant towards it.
| Account | Debit | Credit |
|---|---|---|
| Plant and machinery | £60,000 | |
| Bank | £60,000 | |
| Bank | £15,000 | |
| Deferred grant income | £15,000 |
Each year the machine is depreciated by £12,000 and £3,000 of the grant is released:
| Account | Debit | Credit |
|---|---|---|
| Deferred grant income | £3,000 | |
| Grant income – release of capital grants | £3,000 |
Conditions and clawback
Read the grant agreement for repayment triggers: selling the asset early, missing job targets, moving the business. If repayment becomes probable, recognise the liability and reverse the income. If it is only possible, disclose it as a contingent liability.
Tax treatment
Revenue grants received in the course of a trade are generally taxable as trading income. Capital grants are not taxed as income, but they reduce the expenditure on which capital allowances can be claimed. Some grants have special rules, so check the terms against HMRC’s guidance on grants and subsidies before preparing the computation.
Evidence to keep
The offer letter and conditions, claim forms and the costs they were based on, monitoring reports and correspondence about any variation. Grant bodies can audit years later.
For where grant funding comes from and how to apply, see business grants; for how the funded asset is recorded, fixed assets in the chart of accounts.