VAT-registered businesses can now donate goods to registered charities without facing additional tax charges after HM Revenue and Customs (HMRC) confirmed a significant change to its rules.
Accountancy and advisory firm Azets said the revised guidance removes a long-standing VAT burden that previously applied when companies donated items on which they had already reclaimed tax.
Under the updated rules, eligible goods donated free of charge to registered charities will not attract VAT if they are used to support vulnerable people or assist charitable activities.
Azets has urged businesses to take advantage of the relief by donating surplus stock, office equipment and other unused items to charities.
The change comes as charities continue to face mounting financial pressures amid a decline in public donations.
According to the Charities Aid Foundation, charitable donations fell by more than £1.4billion over the past year as millions of people said they could no longer afford to contribute.
The proportion of people making donations has also declined significantly during the last decade.
Figures showed that just half of the population donated to charity last year, compared with 61 per cent ten years earlier.
HMRC scraps VAT charge on charity donations in boost for struggling sector
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GETTY
The revised VAT treatment could provide charities with an alternative source of support as organisations continue to face falling income from public donations.
Before the rule change, businesses that donated goods after reclaiming VAT on them were treated as making a taxable supply.
This meant companies had to pay VAT to HMRC based on the value of the donated items.
Siobhan Holmes, a partner at Azets specialising in not-for-profit accounting, said many businesses may not have realised the previous rules created a tax charge on donations.
Businesses can support charities without concerns about breaching tax rules
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GETTY“This is excellent news for charities, which we know are receiving less in donations,” Ms Holmes said.
“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.”
Ms Holmes said some companies may previously have disposed of goods instead of donating them because of the associated VAT costs.
“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,” she said.
She added that businesses could now support charities without concerns about breaching tax rules.
“We want to get the message out to businesses that they can now donate to charities without falling foul of HMRC,” Ms Holmes said.
“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.”
The relief is subject to a value limit on individual donated items, while charities themselves remain unable to reclaim VAT on donated goods they receive.
Ms Holmes advised charities to maintain detailed records of donated items, particularly higher-value goods, and ensure there is a clear audit trail.
Azets also warned charities to review their procedures carefully as HMRC continues carrying out Structured Risk Reviews across the sector.