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VAT may be due on charity donations

1st Jun 2018
Independent VAT Consultant
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Planting trees
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Neil Warren explains a recent VAT problem relating to a donation, and gives tips on when charitable donations may be subject to VAT.

I recently became involved with a situation where HMRC demanded output tax on donations received by a charity. This is strange, as donations are generally outside the scope of VAT because the money received does not relate to the supply of goods or services. The reason HMRC gave for demanding VAT was that the payment directly related to a service being performed by the charity.

Here’s an example:

Example 1

Better Soil is an environmental charity which is aiming to plant 50,000 trees in Scotland. It has asked supporters to fund its £500,000 plant a tree campaign, whereby the charity will plant one tree on common land for every £10 donation it receives. So if a donor gives £100 to the charity, this will fund the planting of 10 trees.

The HMRC officer said that because tree planting was a standard rated service, the £10 payments would be standard rated for VAT. In my opinion, this approach is nonsense.

HMRC guidance

HMRC has its own VAT Charities manual, which deals with most of the common VAT dilemmas facing charities. Very helpfully, the VCHAR3400 section is titled: When is a donation not a donation?

To directly quote the first two sentences of the section:

“If there is a direct link between the payment and a benefit received by the giver the monies cannot be treated as a donation. As long as it is clear that a person is under no obligation to make a payment in order to receive certain benefits then the payment is usually a donation.” 

Meaning of guidance

If the donor paid £100 and the charity planted ten trees in his back garden, this is clearly “a benefit received by the giver”. But in the example of the Better Soil charity, the donor has no idea whether his donation will fund trees planted in Edinburgh, Glasgow or Perth (that’s Perth in Scotland and not Australia) – or even no trees at all. The charity is dictating the course of events. So there is no way that the donor has received any benefit from his gift.

Could VAT apply?

When would a charitable donation be subject to output tax? An example from my past life might be useful.

Example 2

Neil is a keen cricket fan and his favourite team (which has charitable status) is building a path from the clubhouse to a new stand. The path will consist of tiles on which supporters can have their name inscribed and linked to their favourite cricketer, in return for a minimum payment of £100. Neil has chosen to have his name linked to his favourite player, the former England wicket-keeper Matt Prior.

Neil is receiving a clear benefit from the club, ie his name is being publicly linked with his favourite cricketer. The payment of £100 is standard rated for VAT and is not a donation.

Gift aid

You may be thinking about the implications of such a “gift with benefits” for the gift aid scheme. You would be right, as there are clear rules on how much benefit the donor can receive for the gift, for it to qualify for gift aid. The value of the benefit is its market value, or how much the donor is prepared to pay for the goods/ services he receives.

Donation

Maximum value of benefit for gift to qualify for gift aid

Up to £100

25% of the donation

£101 - £1000

£25

£1,001 and over 

5% of the donation (up to £2,500)

The payment in Example 2 would not be eligible for gift aid relief, as Neil is prepared to pay the full amount of £100 requested by the club for the inscribed tile, so £100 is the market value for that tile. However, if Neil gave the club more than the £100 minimum payment, say £125, the additional £25 would qualify for gift aid.

Conclusion

If you are involved with charities and HMRC has ruled that output tax is payable on certain donations, be assertive and be prepared to challenge the officer’s decision where appropriate. What better way to do that than by quoting HMRC’s own guidance, ie section VCHAR3400 of the VAT manual!

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Replies (6)

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By The VAT Doctor
02nd Jun 2018 20:16

The tree example is indeed nonsense. The infamous Fiscal Themepark is alive and well in the HMRC parallel universe!

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By Duggimon
04th Jun 2018 09:53

Does that mean you would have to identify the particular trees tied to each donation in order to be sure the donor isn't receiving any benefit from them? Improving the view on their commute or at the caravan park they spend two weeks in every other July would still be a benefit after all.

Furthermore, we need more trees to improve the air quality in our atmosphere so we all receive a benefit wherever the trees are planted.

I'm not so sure Neil's assessment of the example holds much water, there is a direct link between the payment and an (albeit small) benefit, regardless of where the trees go. It's the £10 per tree that provides the direct link, the location of the tree isn't relevant.

They would have been better served looking for donations to fund their tree planting with a suggested donation of £10 as the cost to them of one tree, a promise to plant one tree for every £10 makes it a supply.

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Replying to Duggimon:
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By andyscotland
04th Jun 2018 10:57

What nonsense.

If you follow that line then you could just as easily argue that a "sponsor a child in a developing country" campaign is a supply of services since we all get a benefit from developing countries being stable, educated and healthy. Or "sponsor a polar bear" because the donor enjoys watching Blue Planet.

Every charitable donation should probably be a standard-rated supply of warm fuzzy feelings to the donor. And exempt from Gift Aid since the fuzzy feelings are proportional to how the donor feels about the amount they gave, so market value must be 100% of the gift.

Even if a few trees do happen to end up near a donor, the only logical approach is to say that's purely incidental unless the charity committed at the time of donation to put them in a specific, probably private, location in such a way as to form a contractual obligation between charity and donor.

If the charity is entitled to plant trees wherever it likes then even if it had advertised a few potential locations in advance the donor has no right to a refund if they later choose to plant them somewhere else.

I can see that a campaign to plant a specific single woodland for example on or beside a caravan park might be more arguable. Less so for an occasional user giving £10, more so if a timeshare / static caravan leaseholder gave £5,000.

But a national campaign is very clearly in the ballpark of "generic shared benefit as common with all charitable giving" rather than "direct supply of services".

Thanks (2)
Replying to Duggimon:
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By andyscotland
04th Jun 2018 10:57

What nonsense.

If you follow that line then you could just as easily argue that a "sponsor a child in a developing country" campaign is a supply of services since we all get a benefit from developing countries being stable, educated and healthy. Or "sponsor a polar bear" because the donor enjoys watching Blue Planet.

Every charitable donation should probably be a standard-rated supply of warm fuzzy feelings to the donor. And exempt from Gift Aid since the fuzzy feelings are proportional to how the donor feels about the amount they gave, so market value must be 100% of the gift.

Even if a few trees do happen to end up near a donor, the only logical approach is to say that's purely incidental unless the charity committed at the time of donation to put them in a specific, probably private, location in such a way as to form a contractual obligation between charity and donor.

If the charity is entitled to plant trees wherever it likes then even if it had advertised a few potential locations in advance the donor has no right to a refund if they later choose to plant them somewhere else.

I can see that a campaign to plant a specific single woodland for example on or beside a caravan park might be more arguable. Less so for an occasional user giving £10, more so if a timeshare / static caravan leaseholder gave £5,000.

But a national campaign is very clearly in the ballpark of "generic shared benefit as common with all charitable giving" rather than "direct supply of services".

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By geoffmw1
04th Jun 2018 12:36

This is complete nonsense. The charity should even be able to reclaim any VAT it is charge for planting trees if it is VAT registered. The charity is not selling trees to the donors who are simply responding to a request for funds which has perhaps been explained unhappily.

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By robertleach1
28th Jun 2018 21:22

I can find no record of a charity called Better Soil, yet the article is written as if it exists. If the name is made up, that should be stated.

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