If your business wants to donate goods or services to a good cause, there can be VAT traps for the unwary. How can you use alternative strategies to avoid them and save yourself tax?
Your business may wish to get involved in the local community and support good causes by donating goods or services.
What are the VAT consequences and what are the most tax efficient ways for you to do this?
Donating goods can have unexpected VAT consequences for you, as the business gift rules apply to such transfers. Under these rules if:
- the gift is worth more that £50 (or the total gifts to the same recipient in a twelve-month period are more than £50); and
- you have reclaimed the input tax on the purchase
you have to account for output tax on the gift equal to the input tax originally claimed.
In effect, it claws back the VAT on the donated goods so it becomes an additional cost to the business.
If you donate used rather than new goods, for example if you are updating your computer systems and decide to give the old computer equipment to a school, VAT is due on the current market value rather than the cost price.
Tip: Instead of giving the goods to the local organisation, sell them at a much reduced value. For example sell the used computer equipment to the school for £1.00. VAT is then only due on the £1.00 received in consideration for the goods, not the value of the goods themselves. You could even donate funds to the organisation for them to buy the goods for the reduced price!
Although there are rules that allow HMRC to impose open market value on a transaction, they only apply between connected parties, so they are unlikely to affect you.
Gifts of services
There is no VAT due if your business provides services free of charge. For example, no output tax is due when an accountant prepares accounts for a local charity, or a decorator paints the local football club changing room (providing they do not provide the paint – if they do, VAT is due on the value of the paint donated).
Trap: Remember that in such situations there must be nothing done in return. If there is any non-monetary consideration in the form of services or goods received in exchange, VAT is due on the market value of the supply. So, if your business name is displayed on a team kit in return for free services, VAT is due on the open market value of the services provided.
Loan the goods
The loan of goods is a supply of services. So a local shop could loan ex-display items to a school providing it was understood that they remained the property of the retailer.
A small sticker on the back of the item saying “Property of ABC Ltd” would be enough to show that ownership had been retained and they were not a gift. In that case there would be no VAT due.
Instead of donating used goods, sell them at a reduced value to avoid invoking the business gift rules. Alternatively, loan the goods and retain ownership to avoid incurring any VAT change. Consider providing services for no charge – no VAT is incurred on the supply as long as nothing is received in return.