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Full cost recovery

[Footnote 1]

The government recognises that:

  • No activity can be undertaken without its provider incurring central administrative costs
  • A funder or commissioner has an interest in meeting its fair share of a provider’s central administrative costs because that will help to ensure that the provider can manage its activities and finances properly, and will contribute to the organisation’s sustainability.

This means that your programme must finance its ‘fair share’ of all providers’ administrative costs. This principle is known as‘full cost recovery’. In addition, if the provider is a charity, you must not expect it to subsidise the cost of your programme from donations that it receives [Footnote 2].

Under procurement

Under procurement, it is up to:

  • The potential provider to bid at aprice that it considers to be appropriate, taking account of all its costs
  • You to accept (or not) that bid. In deciding this, you must consider whether the potential provider’s proposed price is sustainable. You cannot give preferential treatment to TSOs. However, as part of good risk management, you must check that any award will provide the degree of continuity of service required by the objectives of the programme.

Under grant

There are two possible scenarios under grant [Footnote 3]. The first is the one in which your organisation wishes to give money to a TSO to contribute towards the TSO’s purpose. You must check that the proportion of the grant that will go towards administrative costs is reasonable and provides value for money.

The second is the one in which your organisation wishes to give a grant to a TSO for provision of a service. You and the provider must agree the full cost of the activities that the provider will carry out on your behalf and the proportion of those that will go towards administrative costs. Transparent costing, rather than pricing, based on a sound methodology, is the best way of ensuring this [Footnote 4].

Under grant-in-aid

Under grant-in-aid, your funding is not restricted to specific activities, so it can be harder to establish the correct amounts of funding needed, including full cost recovery. However, where the funding is intended, for example, to allow the TSO to develop its services in a way that requires taking on additional staff, you and the provider must ensure that the funding will be sufficient to cover at the very least the full costs of those staff and an appropriate share of administrative costs. Transparentcosting, based on a sound methodology (rather than pricing) is the best way of ensuring this [Footnote 4].


The VAT treatment of funding agreements with third sector organisations may vary from case to case and will depend upon the individual circumstances. Activities may either be outside the scope of VAT, exempt from VAT or taxable at the standard, reduced or zero rate of VAT. Factors that influence VAT treatment include the type of activities performed and whether any funding is, for VAT purposes, ‘a consideration for a supply’. In some cases VAT treatment may also vary according to the nature of the supplier or the recipient of the service. Service providers and funders may be uncertain as to the correct VAT treatment of a particular activity and if so should seek clarification from HM Revenue and Customs. In theory there is also a risk that a misunderstanding about VAT may impact upon funding decisions and mechanisms.

To guard against that, you must:

  • understand the implications of VAT for your programme, and have agreed these with HM Revenue and Customs where appropriate
  • include the appropriate amount of money to cover any VAT implications in your projection of expenditure for the programme
  • build relevant irrecoverable VAT costs incurred by the supplier into full cost recovery.

VAT treatment is a complex issue and this DST cannot provide detailed guidance. You should seek guidance from your organisation’s own specialists and from HM Revenue and Customs where necessary.


  1. A new web portal for government contracts worth less than £100,000,, will publicise many contract opportunities.
  2. Charity Commission ruling (2004) – Applications for Registration of Trafford Community Leisure Trust and Wigan Leisure and Culture Trust.
  3. These are discussed in sub-stage 2(b): Choose a financial channel HM Treasury, Guidance to funders, HM Treasury, 2003.
  4. HM Treasury, Guidance to funders, HM Treasury, 2003.

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