Accounting for government grants in company accounts

Two kinds of grant

Grants split broadly into capital grants (towards buying an asset) and revenue grants (towards running costs or a project). The type drives the accounting: a capital grant is usually released to income over the asset's life, while a revenue grant is matched to the costs it funds.

The matching principle applies

Under the matching principle, grant income is recognised in the same period as the expenditure it relates to — not simply when the cash arrives. This stops a lump-sum grant distorting one period's profit and gives a truer performance picture.

The tax treatment

Many grants are taxable as income, though some — and certain capital grants — have specific treatment. Never assume a grant is tax-free; check the terms and the tax position, because an unexpected tax charge on grant income catches directors out.

Conditions and clawback

Grants often carry conditions, and breaching them can trigger repayment. If there is a real risk of clawback, that may need recognising as a contingent liability. Read the grant agreement as carefully as any loan.

Funding the rest

Grants rarely cover the whole cost of a project, and match-funding is common. A facility bridges the gap between grant instalments and your spend.

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