For some years now there has been spasmodic evidence of HMRC trying to disallow an element of input VAT recovery where income outside the scope of VAT (typically government grants) is linked to the acquisition of standard rated supplies. This can happen where a business incurs expenditure in order to secure a Countryside Stewardship Scheme (CSS), or in a non-agricultural context, where a charity receives substantial donation income which funds a business infrastructure project.
Source: icaew.com
