Non-profit organisations play a critical role in delivering social, educational, health, community development and welfare programmes across South Africa. Many of these organisations rely heavily on funding from private donors, corporates, public entities, SETAs and government departments.

In practice, these payments are often described as “grants”, “donations”, “funding allocations” or “programme funding”.

However, for VAT purposes, the description used in the agreement is not conclusive. The real question is whether the payment is genuinely a donation or grant, or whether the NPO is being paid to provide services.

This distinction is becoming increasingly important for NPOs, particularly where funding is received from government departments or public bodies.

The Core VAT Principles

VAT is generally payable where a VAT vendor supplies goods or services in the course or furtherance of its enterprise.

The VAT Act defines “consideration” widely and includes payments made in respect of, in response to, or for the inducement of a supply.

A genuine donation is generally not subject to output VAT because it is not consideration for a supply. Similarly, certain government grants may qualify for zero-rating under the VAT Act where the payment falls within the specific statutory provisions dealing with grants or subsidies.

However, these rules do not apply merely because the agreement uses the word “grant” or “donation”. Where the NPO is required to perform specific services, deliver defined outputs, submit invoices, report against milestones, or implement a programme on behalf of the funder, the payment may be regarded as consideration for taxable services.

The Risk in Government-Funded Programmes

The VAT risk is particularly significant in government-funded arrangements.

In many instances, a government department or public body has a statutory, policy or regulatory mandate to deliver a particular programme. However, it may not have the internal capacity, specialist skills, geographic reach or community relationships to implement the programme itself. It may therefore contract with an NPO to deliver the programme on its behalf.

Although the arrangement may be documented as a grant agreement, the substance may indicate something different. The NPO may, in reality, be acting as an implementing partner or service provider to the government department.

What SARS and the Courts Are Looking At

The key issue is substance over form.

SARS and the courts will generally consider whether:

• the funder receives an identifiable direct benefit;
• the NPO is required to perform specific activities or services;
• the NPO is delivering a programme that falls within the funder’s own mandate;
• payments are linked to milestones, deliverables or performance targets;
• invoices are issued for the funding;
• reports, reconciliations and supporting documents must be submitted before payment;
• the funder has oversight, approval or control rights; and
• the NPO is acting independently for its own purposes or as an implementing arm of the funder.

Where these factors point to a supplier-client relationship, the payment may fail to qualify as either a true donation or a zero-rated grant.

Consequences of Incorrect VAT Treatment

Incorrect VAT treatment can have serious consequences for an NPO.

If SARS determines that a payment treated as a donation or zero-rated grant was actually consideration for taxable services, SARS may raise output VAT at 15%, together with penalties and interest.

This can create a significant cash-flow burden. In many cases, the funding may already have been spent on salaries, programme costs, beneficiaries, suppliers or community activities. If the funding agreement does not allow the NPO to recover VAT from the funder, the VAT cost may have to be absorbed by the NPO.

There may also be broader governance and reporting consequences. Boards, funders and auditors may question why the VAT treatment was not properly assessed before the agreement was signed, particularly where the contract contained clear deliverables, invoicing requirements and performance obligations.

Why Agreements Should Be Reviewed Before Signature

NPOs should not wait for a SARS query or audit before considering the VAT treatment of grant funding.

A specialist VAT review before signature can help determine whether the funding is properly treated as a donation, a zero-rated grant, or consideration for taxable services. It can also help ensure that the agreement is drafted consistently with the intended VAT treatment.

This is especially important where the funder is a government department, public entity, SETA or institutional funder, and where the NPO is required to implement a defined programme, meet measurable deliverables or submit invoices.

In Conclusion

NPOs should not assume that a payment is outside the VAT net simply because it is called a grant or donation.

The correct VAT treatment depends on the legal substance of the arrangement, the obligations imposed on the NPO, the benefit received by the funder, and the specific provisions of the VAT Act.

Before concluding material funding agreements, NPOs should obtain specialist VAT advice to avoid unexpected VAT assessments, penalties, interest and cash-flow strain.

For NPOs, the message is simple: