Contracts, SLA’s and Grants

Contracts, SLA’s and Grants
Senscot, HIE

Introduction and Executive Summary

This briefing note has been commissioned by Highlands and Islands Enterprise (HIE)  to clarify the definitions of contracts, service level agreements and grants  by public sector organisations in funding social  enterprises to deliver or provide services and to look at the legal and other  implications of using the different types of financial arrangements.  It has been prepared by Senscot with support from the law firm MacRoberts LLP and the Pool, DTA Scotland’s consultancy service.

There is currently a wide range of terms used to describe the financial arrangements between public authorities and social enterprises. The most common terms are ‘grants’, ‘contracts’ and ‘service level agreements’ (often abbreviated to SLAs).  Others include ‘performance grants’, ‘management contracts’, ‘management fee contracts’, and ‘service contracts’.

There is also a wide range of understanding, especially amongst social enterprises, of the differences between various types of financial arrangements and the practical implications these differences have in legal, financial and other terms.

These implications can be significant. For example:
• The legal liabilities for each party will vary considerably depending on whether the financial arrangement is a contract or a grant. For example, a contract for delivery of a service by a social enterprise may include clauses which could allow a public sector organisation to seek damages over and above the value of the contract if the social enterprise fails to meet its contractual obligations (and similarly a social enterprise might be able to seek compensation if the public authority fails to meet its obligations). 
• The tax position and liability of a social enterprise in respect of VAT and corporation tax will be affected by whether income is grant income or income earned under a contract.
• Similarly, income from a grant and from a contract may or will generally be treated differently in a social enterprise’s accounts. In turn this could affect whether a social enterprise is regarded as being a trading organisation, a “going concern” and a suitable enterprise for investment, support and so on.

In view of these implications, it is very important that social enterprises and public authorities both understand the real nature of the financial arrangement they are entering into and also choose the most appropriate form.

As different names can be applied by different organisations to describe the same arrangements, it is often sensible for social enterprises and public authorities not to focus on what they call an arrangement but rather put aside the various names and focus on:
• whether they are entering into a grant or a contract (which may sometime be called an SLA or be accompanied by an SLA) and
• the legal and other implications of the provisions of that grant or contract.

This will both clarify the legal status of the arrangement and also, more broadly, assist in establishing whether income associated with it should be regarded as trading income for different purposes.

There is no one factor which determines whether funding is being provided under a grant or under a contract. It is important to analyse the arrangement as a collective whole and social enterprises should be doing this as a matter of course, in any case, in order to determine risks and liabilities. There are a number of features which can be assessed and these are described in detail in the briefing note which contains sections on contracts, SLAs and grants.

In conclusion, in order for social enterprises and public authorities to minimise the risks arising from the financial relationships they enter into together, it is important for each entity to obtain clarity about the nature of that relationship from the outset.

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