Grant income received – Performance Accountancy – MTD

Let’s address grant income. Sometimes musicians, performers and other creative professionals receive grants from organisations such as Arts Council England, Help Musicians or similar funding bodies. The tax treatment depends on why the grant was given in the first place.

If it is a development grant, it may not be taxable. In that situation, you may be able to record it as owner’s funds introduced, rather than as income. In Xero, that could mean coding it to account 970, owner’s funds introduced. It would not then go through the income statement as taxable business income.

However, some grants are taxable. For example, if the grant is replacing income, or is intended to cover trading income that you would otherwise have earned, then it may need to be treated as taxable income. The paperwork that comes with the grant is therefore very important.

In this example, I have a grant from Help Musicians. On the face of it, it may not normally be taxable, but for the purpose of this demonstration I am going to treat it as taxable, so you can see how to record it in Xero.

From the bank reconciliation screen, the contact is Help Musicians. If the paperwork confirms that the grant is a development grant and not replacement income, you could code it to 970, owner’s funds introduced. But in this example, we are assuming that it is a replacement of income.

When I search for a suitable grant income account, there is not currently one available. So I need to come out of the bank reconciliation screen and go to the chart of accounts. You could do this in a different browser tab, but you would then need to refresh the bank reconciliation screen afterwards.

In the chart of accounts, I add a new account. I treat it as revenue, give it a code such as 265, and call it taxable grant income. The description can say something like grants received as taxable income. Once that is saved, the new taxable grant income account becomes available in Xero.

I then go back to the bank account and return to the reconciliation screen. I find the Help Musicians receipt, set Help Musicians as the contact, and code the receipt to taxable grant income. I might add a description such as grant as replacement income. Once I press OK, that income will appear in the quarterly update to HMRC.

It is possible that you may later discover the grant was not actually taxable. To correct that, go to reports and look for the account transactions report. If it is not immediately visible, you can search for it in the reporting menu.

From there, search for the grant income account and choose the relevant financial year. Once you find the transaction, click into it and edit the transaction. This can be done even if that quarter has already been submitted.

If the grant should have been treated as a development grant, change the coding from taxable grant income to 970, owner’s funds introduced. You can update the description to make it clear that it is a development grant. That moves it out of taxable income.

The key point is that you may receive grant income before you are completely sure how it should be treated. The only proper way to decide is to look at the paperwork that came with the grant and understand whether it was given as development funding or as a replacement for income.