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Consultation to come on VAT on charity donations

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Following last week’s Tax and Administration Maintenance Day, Jason Croke looks at the consultation and proposals concerning charity gifting and donations, plus the implications that currently has on businesses and what the final proposals might look like.

24th Apr 2024
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At Spring Budget 2024, the government committed to launching a number of consultations on the impacts of recent high court ruling relating to the private-hire vehicle sector, umbrella companies and charitable donations.

Here we consider the consultation and proposals concerning charity gifting and the donation of goods and stock.

Business or non-business

The right to reclaim input tax has always been on the basis that the expenditure incurred on purchases is used in the making of “taxable business supplies”. In English, if a business makes sales that are subject to VAT (0%, 5% or 20%) then they can reclaim their input tax, the opposite position being a business that makes exempt sales, whereupon they cannot reclaim any input tax.

Where a business gives stock or goods away for free – be it for a competition to increase sales and awareness or more often as charitable donations – the issue arises that the business has not made a taxable business supply of those goods and therefore cannot reclaim input tax.

Business gifts and existing zero rating for charities

Section 2 of the business promotions guidance in Notice 700/7 covers the rules where a gift under £50 does not require any input tax adjustment and there are no changes in that regard.

Section 2.7 of the same notice states that goods donated to charity may be zero rated, provided the charity lets or exports them. This is quite a narrow window, perhaps more beneficial if exporting care packages to war or disaster zones but not much benefit in general day-to-day charity activities.

There are of course zero-rating opportunities when selling to a charity where those goods are to be used for certain situations, be it research or disability, but those zero ratings are related to business sales – that is, where a business sells goods to a charity and zero rate applies. The consultation document looks at where a business gives goods away for free (non-business).

Where gifts are made exceeding the £50 rule, the business making the gift will declare output tax on the value of the goods gifted. The point being, the business incurs a cost when making a donation of goods and this is a potential disincentive.

Helping the less fortunate

The HMRC consultation launch document states that the sort of areas being considered involve hygiene items such as soap, toothpaste, toothbrushes, shower gel and toilet rolls; cleaning supplies such as laundry detergent; and second-hand items from hotels such as sheets, towels and kettles.

Those suggestions seem to set out, to me, a clear indication of where the proposals are headed. We may be familiar with the shoe box of personal hygiene items, and a toy and book that go to less-fortunate children across the globe and also charities dealing with homelessness or helping vulnerable people settle into housing for the first time.

I can see how this could produce a great benefit to those charities that focus on the homeless, be it victims of domestic violence requiring a temporary place to live with their children or coming out of prison and needing a halfway house. Charities being able to receive second-hand hotel supplies could be a significant benefit to those charities as well as to the hotel and at a stretch, the environment if such second-hand goods can be re-used rather than discarded.

Let’s not get too excited though (for now)

The proposals will not include goods that are donated to charities for them to use, so donating new IT equipment would not be covered. HMRC is potentially concerned that a for-profit entity could buy computers and donate them without consequence to a charitable subsidiary.

It is clear that HMRC has one eye on avoidance at the same time as wanting to facilitate the genuine donation of goods to charities. It is therefore quite a difficult balancing act to legislate in a way that doesn’t prevent real benefits being achieved because of the potential for avoidance elsewhere.

How to participate

The consultation intends to consider a UK-wide VAT relief for a range of low-value household goods.

The consultation will last 12 weeks and will commence sometime before 23 July 2024 and there is currently no proposed finish date or when the outcome of the consultation will be implemented.

This is all a bit disappointing but probably due to the uncertainty of elections and time already being taken up with other consultations announced in the Tax and Administration Maintenance Day on 18 April, relating to private-hire taxis and umbrella companies.

It’ll likely mean another very narrow set of definitions that will target a specific sub group of charities, which will be great for those charities and the users of those charities, but another layer of complexity for businesses who want to do the right thing.

Replies (1)

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By FactChecker
24th Apr 2024 14:24

I understand the slight tone of despondency ... the possibility of increased complexity for donors counter-balanced by the greater likelihood that politics will intervene and so nothing changes!

But I'm curious .. in that all the examples only cover the 'initial transaction' (i.e. the impact of the gift/donation).
I guess this is logical in the context of looking at what TAMD announced, but (as it crops up so often in AA) can we have a follow-on sometime - which covers what happens if the gifted assets aren't used or distributed for free (as above), but are sold in order to raise cash funds for the charity?

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