Grants that pay for running costs, such as wages, rent, training or interest, are normally taxable trading income for both Income Tax and Corporation Tax. Grants towards capital spending, such as machinery or buildings, are normally not taxed as income, but they reduce the expenditure on which you can claim capital allowances. Grants given for no specific purpose are treated as revenue and taxed.

How does HMRC decide whether a grant is taxable?

There is no general exemption for grants. HMRC’s Business Income Manual at BIM40451 says grants are subject to the normal tax rules, supplemented by section 105 ITTOIA 2005 and section 102 CTA 2009, and that the treatment depends on whether the grant is capital or revenue. BIM40455 confirms that grants from UK government departments, local authorities and EU funds follow these normal principles, unless they are Coronavirus support payments, which have their own rules.

The same analysis applies to sole traders, partnerships and companies. What changes between them is timing, the accounting basis and how capital allowances are claimed.

Which grants are revenue and which are capital?

Revenue grants

BIM40451 says grants that meet revenue expenditure, giving interest payable as an example, are normally trading receipts. In practice that covers grants towards wages, apprentices, training, marketing, rent, energy bills and similar day to day costs. The leading cases cited are Smart v Lincolnshire Sugar Co Ltd and Burman v Thorn Domestic Appliances (Electrical) Ltd.

Capital grants

Grants that meet capital expenditure are normally not trading receipts. BIM40451 gives grants paid to acquire capital assets, or to help bring a trade or part of a trade to an end, as examples, citing Seaham Harbour Dock Co v Crook. The underlying distinction is the one explained in capital vs revenue expenditure.

Grants with no stated purpose

A grant not tied to particular spending is an undifferentiated receipt. BIM40451 says it should be regarded as revenue, following Poulter v Gayjon Processes Ltd and Ryan v Crabtree Denims Ltd. If a grant letter splits the award between equipment and running costs, keep it: that split usually decides the tax treatment of each part.

Grants for non trading activities

BIM40455 notes that a grant for an activity that is not a trade is not taxable as trading income. That does not make it tax free in every case, but it is not part of the trading profit.

When is a grant taxed?

For companies and traders using traditional accounting, the timing follows the accounts. FRS 102 Section 24 says government grants are not recognised until there is reasonable assurance that the entity will comply with the conditions and that the grant will be received (paragraph 24.3A). Entities choose, class by class, between two models (paragraph 24.4):

  • Performance model. A grant without future performance conditions is recognised in income when received or receivable; one with conditions is recognised only when they are met, and is held as a liability until then (paragraph 24.5B).
  • Accrual model. Revenue grants are matched against the costs they compensate for (paragraph 24.5D). Grants relating to assets are recognised over the asset’s expected useful life, with the deferred part shown as deferred income rather than deducted from the asset (paragraphs 24.5F and 24.5G).

Because a capital grant is normally not a trading receipt, any release of it to the profit and loss account under the accrual model is usually taken out in the tax computation, and the grant is dealt with through capital allowances instead. Under the cash basis, receipts are taxed when received in the tax year.

When does a grant reduce capital allowances?

Sections 532 and 533 of the Capital Allowances Act 2001 deduct contributions from qualifying expenditure. HMRC’s Capital Allowances Manual at CA14100 explains that the general rule applies whether the contribution comes from a public body or anyone else, whether it is capital or revenue in nature, and even if it is received after the spending. A non returnable grant counts where there is a clear connection between the grant and the expenditure, and in Cyril Lord Carpets Ltd v Schofield a grant applied for after the assets were bought was still deducted. A loan is not a contribution.

So if a £20,000 machine is part funded by an £8,000 grant, allowances such as the Annual Investment Allowance or full expensing are claimed on £12,000. There are limited exceptions in CA14200 onwards; for example BIM40460 notes that recipients of certain Northern Ireland regional development grants are treated as having incurred the expense themselves. More on allowances generally is in capital allowances explained.

For capital gains, BIM40451 also points to section 50 TCGA 1992, which excludes from the computation of a gain any expenditure met directly or indirectly by the Crown or by any government, public or local authority. A publicly funded part of an asset’s cost therefore does not count as base cost when the asset is sold.

How do grants work under the cash basis?

Under the cash basis, most capital spending on equipment is deducted as an expense when paid (BIM72035). That changes the logic for capital grants. HMRC’s guidance at BIM72020 explains that certain capital receipts are brought into a cash basis trader’s profits, including capital refunds relating to an asset whose cost has been deducted, and section 105(2A) ITTOIA 2005 specifically taxes industrial development grants towards capital expenditure for cash basis traders. If you have deducted the full cost of equipment and then receive a grant that in substance refunds part of it, review the treatment carefully rather than assuming the grant is tax free.

Are there special rules for particular grants?

Industrial development grants

Grants under sections 7 or 8 of the Industrial Development Act 1982, or the Northern Ireland equivalents, must be brought in as trading receipts under section 105 ITTOIA 2005 or section 102 CTA 2009. The exceptions are grants designated as towards specified capital expenditure (except under the cash basis), grants designated as compensation for the loss of capital assets, and grants towards a Corporation Tax liability. Section 105 does not apply to professions or vocations.

Coronavirus support payments

Section 106 and Schedule 16 Finance Act 2020 govern Coronavirus support payments, including the Coronavirus Job Retention Scheme, the Self Employment Income Support Scheme and local authority business grant schemes. BIM40456 says all of them are revenue in nature and taxable in the business they relate to. BIM40458 adds that SEISS was taxed in the tax year of receipt regardless of the accounting basis, and that the trading allowance cannot be set against a SEISS payment. These payments can still surface in enquiries into earlier years.

A worked example

Illustration only. A company receives a £20,000 grant: £8,000 towards a £20,000 machine and £12,000 towards an apprentice’s wages for the year. It uses the accrual model and depreciates the machine over five years.

  • The £12,000 wage grant is credited to profit as the wages are charged and is taxable as trading income.
  • The £8,000 machine grant is held as deferred income and released at £1,600 a year. Each release is deducted in the tax computation because it is a capital receipt.
  • The company claims capital allowances on £12,000 (£20,000 less the £8,000 contribution), not £20,000.

For how taxable profits feed into the company’s bill, see Corporation Tax explained.

What mistakes come up most often?

  • Treating every grant as tax free because it came from a public body.
  • Claiming capital allowances on the gross cost of an asset part funded by a grant.
  • Leaving the release of a capital grant in taxable profit while also restricting allowances, which taxes it twice.
  • Treating an unrestricted grant as capital when the default for undifferentiated receipts is revenue.
  • Recognising a conditional grant before there is reasonable assurance the conditions will be met.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.