When will I have to pay tax on a grant that is paid early

HelloTaxTax

Hello, 
Wondering if anyone can help with this.

I have recently been awarded a grant by a charity to do some work during the next finanical year (22/23). They have not yet sent me the money. 
I will be quitting my current job in March so that I can start that work in April (I will be self-employed and funded by the grant).

However, the charity is able to give that money to me now.

If they were to give me the grant early (i.e during the next month) would I have to pay tax on it for the 21/22 financial year or can the grant income be counted against 22/23 income (i.e. when the work will be done) instead? I can't find any guidance form HMRC on this.

Any help or direction here would be really useful.

Thank you!

Jeremy535897

If you are genuinely going to be self employed, then you have to decide whether to be taxed on the cash or accruals basis. It is also critical to understand the extent to which you will incur expenses allowable for tax in carrying out the work.

The cash basis would tax the receipt when it was paid to you, and allow the expenses when you paid them. Assuming the expenses are paid in the tax year following the receipt, this would be a disaster as there would be no income to relieve the expenses against.

If you adopt the traditional (accruals) method, you look at the appropriate accounting standard in FRS 105 (micro-entities). That says, of government grants at least, that:

"19.7 Government grants relating to revenue shall be recognised in income on a systematic basis over the periods in which the micro-entity recognises the related costs for which the grant is intended to compensate."

From https://www.frc.org.uk/getattachment/fb775a35-08b0-41ad-b164-ff0414a61e33/FRS-105-WEB-READY-2015.pdf

If this is more analogous to a case where there is a rendering of services for an up front payment, FRS 105 says:

"18.13 When the outcome of a transaction involving the rendering of services can be estimated reliably, a micro-entity shall recognise revenue associated with the transaction by reference to the stage of completion of the transaction at the end of the reporting period (sometimes referred to as the percentage of completion method). The outcome of a transaction can be estimated reliably when all the following conditions are satisfied:
(a) the amount of revenue can be measured reliably;
(b) it is probable that the economic benefits associated with the transaction will flow to the micro-entity;
(c) the stage of completion of the transaction at the end of the reporting period can be measured reliably; and
(d) the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.

Paragraphs 18.18 to 18.24 provide guidance for applying the percentage of completion method.

18.14 When services are performed by an indeterminate number of acts over a specified period of time, a micro-entity recognises revenue on a straight-line basis over the specified period unless there is evidence that some other method better represents the stage of completion. When a specific act is much more significant than any other act, the micro-entity postpones recognition of revenue until the significant act is executed."

I suggest you read through sections 18 and 19 of FRS 105 to see how your precise circumstances fit with them.