Grants and service contracts in The Big Society
In just over 20 years we have gone from the denial by Margaret Thatcher that there was such a thing as society to "The Big Society". The government wants to encourage more local engagement and service provision by the third sector but it is clear there will be very limited money to go with that encouragement. The charitable incorporated organisation (CIO), a vehicle which may be well suited to help communities get some projects off the ground, won't be with us until at least next year. The cliff face of grant cuts next March looms into view but the Big Society Bank won't be established and lending money until November next year.
So it's all about making the most of what you can get now. What's the difference between grant funding and service contracts, why does it matter and what can you do to maximise your legal position in respect of both?
It can sometimes appear to be unclear whether a payment of money subject to conditions and meeting key performance indicators is a grant or a payment for services but, essentially, money paid to the recipient in an area of work the funder wishes to sponsor but for which it doesn't receive direct benefit in return is a grant.
Contrast that with a contract from which both parties seek something tangible- payment for services rendered, especially where the paying party is obliged by legislation to ensure those services are delivered.
So by way of example, a grant-funding charity gives another charity the money it needs to build a hospice (grant) while a Primary Care Trust funds an NHS Trust to build a hospital (under a contract for services). Why does it matter? There are several main reasons. One is tax. VAT is not charged on a grant but gift aid may be available on it. By contrast, VAT is charged on payments for many services and gift aid is not available because there is no gift.
Another reason why it matters is because of the possible application of the EU procurement regime - implemented in the UK through the Public Contract Regulations 2006 - which relates to contracts for services but not to grants. If the rules aren't followed- ie if the relevant authority does not go through the process of publishing an advertisement and having competitive tenders submitted - then any contract award could be challenged and the contract could be subject to a "Declaration of Ineffectiveness", which means that a signed and operational deal could be made void by an order of the Court. Also, even if the Regulations don't apply, the award could still be challenged under EU Treaty principles on the grounds of fair dealing and transparency.
So are there any "top tips" in this area?
Traditionally, grants have been given to fund work designed and proposed by the organisation the funder wishes to sponsor. Charities should not be afraid to be pro-active and creative in the provision of services; where appropriate they could seek to help design the procurement process of commissioning bodies to ensure the inclusion of socially meaningful outcomes, rather than waiting for the tender to arrive and then having to sign up to provide services in accordance with reams of stringent (and meaningless?) outputs.
Look at the small print. If there are lots of requirements with which the recipient must comply and the language seems inappropriate for a grant (eg "contractor", "performance standards") but you still consider you're signing up to a grant then do your best to have a clause inserted providing that while the parties consider VAT does not apply, if HMRC decided that it did then the payment would be deemed exclusive of VAT - so that VAT doesn't diminish the size of the grant. This may be acceptable to the grant funder, especially if it can recover VAT.
Devise a simple checklist for relevant staff to identify whether it's a contract or a grant or at least to raise the question in their minds so they can seek advice where appropriate. Also, in either scenario, prepare a summary of the key terms and diarise your obligations. Especially in the current economic climate, both funders and commissioners will want to maximise the bang they get for their buck so you should minimise the risk of a grant clawback or any claim for damages for breach of contract against you.
Even if you remain sceptical about The Big Society make sure you don't miss out on the opportunities which remain.
August 2010