What Is a Contract? Understanding Exchange Transactions in Charities

We’ve already talked about what is a grant, which are gifts with a purpose. But what about when your charity gets money in exchange for doing something?

That’s when it becomes a contract - also known as an exchange transaction.

What is a contract?

A contract is an agreement where your charity promises to do something, and the other person (or organisation) promises to pay you for doing it.

It’s a fair swap - something of value goes both ways. You give something (like a service, training, or report), and you get something back (usually money).

For example:

• Your charity is paid £2,000 to deliver workshops in schools.
• A local council pays you £500 to run a community event.
• You sell tickets for £10 each to your fundraising concert.

In each case, the person paying you gets something in return - so it’s a contract, not a grant.

The key difference

A simple ‘rule of thumb’ guide is:

• If they’re giving money to help your cause → It’s a grant

• If they’re paying money to get something from you → It’s a contract

With a grant, the funder’s aim is the success of your charitable aims.

With a contract, the funder’s aim is getting what they paid for.

It’s important to get this right, as the paperwork can often be misleading – always ask for help if you’re not sure.

When do you count the income in your accounts?

(In line with new new Charity SORP for accounting periods starting on or after 1 January 2026.)

Under the new SORP 2026 rules, charities must think carefully about when to record income from contracts, and to record their findings.

It’s no longer just “money received = income.”

You now have to look at performance obligations - in other words, what you promised to do and when you promised to do it.

Here’s how it works:

1. Identify the contract - Is there a clear agreement with rights and obligations on both sides? If it’s a grant, nothing further to do. If it’s a contract, continue to step 2.

2. Identify what you promised to deliver - These are your “performance obligations” broken down into the individual promises to deliver goods or services. This might be 1 service, but that service may have component parts that are recorded as income at different times e.g. if you’re delivering a course there may be initial delivery of materials/textbooks etc, then the teaching, then an exam at the end. These component parts need to be identified.

3. Determine the transaction price - How much the customer will pay for each individual promise you have made.

4. Decide when each obligation is met:

• If the charity delivers a service over time (like weekly classes), you recognise the income as you deliver each part.
• If the charity delivers a one-off project or report, you recognise the income when that’s complete.
• If it’s a mixture you need to split the parts and record the price at the time that part is delivered or complete. E.g. for the course materials, teaching, examination the income for each part will be recorded as each part is completed. So, the materials at the beginning, the teaching over time, and the exam at the end.

5. Match income to delivery - Don’t record it all at once if the work spreads over months or years. (Note: this is different for grants which are recorded when the charity has the right to receive consideration from the grant maker).

So, if your charity signs a £12,000 contract to run support sessions for a year, you would record £1,000 per month - because you’re earning it month by month.

Watch out: VAT on contracts

Some contracts may be subject to VAT, depending on what your charity is providing and who you’re providing it to.

• For example, selling tickets, workshops, or training sessions could attract VAT if your charity is VAT-registered, or count towards your taxable turnover if you’re not.
• Sometimes it’s clear, but often it’s tricky - especially when contracts include mixed activities (some taxable, some exempt).

Just because you are a charity does not give you any automatic exemptions for VAT registration. You will need to monitor any taxable supplies on a rolling 12 month basis to check if you go over the £90k threshold.

Tip: Always get specialist VAT advice if you’re unsure. Treating contract income incorrectly for VAT can be expensive and create compliance problems. We work alongside a great VAT specialist and are always happy to do an introduction 😊

What about “Restricted Contracts”?

Sometimes funders call their payments “grants,” but the agreement says you must deliver specific work, outputs, or reports - and that they can withhold payment if you don’t.

That’s a contract, not a grant, even if it looks like one.

The label doesn’t matter - what matters is whether both sides are giving something of value. The normal ‘fund accounting’ rules apply and you still need to track this as a restricted fund.

Why It Matters

Getting this right is important for recognising the income at the right time and staying compliant with the new SORP. Understanding the rules is key.

1. Grants (non-exchange income) are recognised differently depending on conditions:

• If the grant doesn’t have any performance conditions, you record the income as soon as the money is received or receivable.
• If the grant has performance conditions, you only record the income once those conditions are met.
• If you receive money before the conditions are met, you record it as a liability until the charity has fulfilled the requirements.

2. Contracts (exchange income) are recognised as you deliver what you promised - following the charity’s performance obligations. Under the new rules, charities must think less about when money arrives in the bank, and more about when it’s earned.

Final Thought

When money comes in, ask this simple question:

“Is this a gift to help us do our work, or a payment for something we’ve agreed to deliver?”

If it’s a gift, it’s a grant.

If it’s a payment, it’s a contract - and remember, you may need specialist advice for VAT.

Knowing the difference helps your charity stay on top of its finances - and show everyone that your work (and your accounting) is done with care and integrity.

Grants vs Contracts – Quick Guide