A long-standing tax rule that imposed VAT on businesses making charitable donations has been scrapped by HMRC, according to accountancy and advisory firm Azets. The firm is reminding businesses that they can now donate goods to registered charities without incurring VAT charges.
Decline in Charitable Giving
The announcement comes amid a significant decline in charitable giving. The Charities Aid Foundation (CAF) recently disclosed that public donations to worthy causes plunged by more than £1.4 billion last year. Millions of people stated they can no longer afford to contribute, with just half of the population donating to charity last year, down from 61 per cent a decade ago.
Previous Rule and Its Impact
Prior to the recent change, if a VAT-registered business made a donation and had already reclaimed the VAT paid on those goods, the donation was typically treated as though the business had made a sale. This meant the business was usually required to pay VAT to HMRC based on the value of the donated goods. Many businesses were unaware that donations were liable for VAT, and some may have disposed of goods rather than donate them to avoid the tax.
Expert Comment
Siobhan Holmes, an Azets partner specialising in not-for-profit accounting, said: "This is excellent news for charities, which we know are receiving less in donations. Essentially, HMRC has confirmed that for VAT-registered companies, no VAT will be due when eligible goods are donated free of charge to registered charities, where those goods are used to support people in need or are to deliver charitable services."
She added: "The changes remove the VAT that previously applied because the business had reclaimed the amount when it originally bought the goods. However, this relief does include a monetary cap per item and charities cannot reclaim VAT on the donated goods. Many will be unaware that donations were liable for VAT, but there will also be companies that might have disposed of goods rather than donated them because of the tax they would have to pay. We want to get the message out to businesses that they can now donate to charities without falling foul of HMRC."
Practical Advice
Office supplies and equipment, or surplus stock, is often welcomed by charities and there will be other goods that will be of great use to them. For their part, charities should make a record of donated goods - especially any expensive items - and keep an audit trail.
Compliance Measures
Azets has additionally cautioned charities and not-for-profit organisations to ensure all their processes and documentation are thoroughly robust in light of new and strengthened compliance measures. HMRC has launched a programme of Structured Risk Reviews (SRRs) across the charity and not-for-profit sectors, indicating a more rigorous and data-led approach to scrutiny.
