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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:
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.
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