What is the difference between a small business grant and a loan?

The pandemic triggered a series of measures introduced by the Government to help businesses out. But, there is a lot of information to go through and it can be quite confusing when you are not an accountant.

According to a BBC news article published on 8th August 2020:

“Four months after £12bn was released to help them through the coronavirus pandemic, £1.5bn is unclaimed.”

The main reason for this is because business owners are not aware of the difference between a loan and a grant. 

And it makes perfect sense. We know how much time you need to run your business and the overload of available information doesn’t  answer your query: what is the difference between a small business grant and a loan and what does this mean to me?

Well the difference is that one you have to pay back and the other you don’t. 

Ok, so what does this mean for you?

  1. Business loan

A business loan is money you receive and need to pay back within an agreed timescale. This usually attracts interest, but with the current schemes announced it means you can apply for a loans for a term of up to 6 years and you will not pay any interest or fees for the first 12 months of the loan, as this is covered by the Government. 

  1. Grant 

This is different to a small business grant, which you don’t need to pay back. However, it can be subject to tax, if you make an overall profit. Also, the grant received will count towards the state aid de-minimis which is currently set at – €200,000 over a 3 year period. Also, Payments of £25,000 count as state aid under the COVID-19 Temporary Framework. The limit for the framework is €800,000.

If you meet certain criteria (which you can find here) you may be eligible for a grant of £10,000 without repaying it back.

Some of these grants will be offered on the basis that you must also invest the equivalent amount in your business. For example, if you’re given a £10,000 grant, you’ll need to have £10,000 to invest too. This will be an allowable expense and therefore not tax to pay. 

However, if you spent less than £10,000, any amounts you are left over with will be liable to Corporation tax.

Are there any VAT implications? 

No guidance has been provided by HMRC as to whether the grants will be subject to VAT or count towards turnover for VAT registration limits. However, normal principles are expected to apply meaning that these will be outside of scope of VAT and no output VAT should have to be accounted for. Also the grant income should be disregarded for VAT registration and deregistration limits.