Why are donations disallowed in tax?
Donations by individuals to charity or community amateur sports clubs (CASCs) are tax-free. This is called tax relief.
The tax goes to you or the charity. How this works depends on whether you donate:
- through Gift Aid
- straight from your wages or pension through a Payroll Giving scheme
- land, property, or shares
- in your will
This also applies to sole traders and partnerships. There are different rules for limited companies.
If you want to donate to a sports club, check if it’s registered as a community amateur sports club (CASC). You cannot donate to a CASC through Payroll Giving.
Your limited company pays less Corporation Tax when it gives the following to charity:
- equipment or trading stock (items it makes or sells)
- land, property, or shares in another company (shares in your own company don’t qualify)
- employees (on secondment)
- sponsorship payments
- You can claim tax relief by deducting the value of your donations from your total business profits before you pay tax.
There are different rules for sole traders and partnerships.
Deduct from your profits
Claim relief in the Company Tax Return that covers the accounting period during which you made the donation or sale if you have:
- donated money
- given or sold land, property, or shares
Enter the total value of your donations in the ‘Qualifying donations’ box of the ‘Deductions and Reliefs’ section of your tax return.
There are special rules for working out the value of your donation if you give or sell land, property, or shares to a charity.
Deduct as business expenses
Deduct costs as normal business expenses in your company’s annual accounts if you have:
- seconded employees
- sponsored a charity
Claim capital allowances
Claim capital allowances on the cost of equipment you donate in your company’s annual accounts.
If you give land, property, or shares to a charity (this includes selling them for less than their market value), you could pay less:
- Corporation Tax and Capital Gains Tax - if you’re a limited company
- Income Tax and Capital Gains Tax - if you’re an individual
If you give land property or shares to a CASC, you could pay less Capital Gains Tax if you’re a limited company or an individual.
If you donate more than your profit
The most you can deduct is the amount that reduces your company’s profits to zero.
If you donate more than the total profits you can’t:
- declare trading losses on your tax return
- carry over any remaining amount to your next tax return
Taxable sales are business transactions that are liable to VAT at standard, reduced, or zero rates. Guidance on whether something is a business transaction can be found in section 4. Many charities make taxable sales and if your level of income from those sales exceeds the VAT registration threshold you will need to register for VAT. This is not optional and there are penalties if you fail to register on time.
Charities whose business activities take place wholly outside the UK can register for VAT if those activities would be taxable were they to take place in the UK.
If a charity’s income from taxable sales is below the VAT registration threshold you can register for VAT voluntarily. But if a charity’s income from taxable sales is below the threshold, and you do not want to register for VAT, the charity does not need to charge VAT on any of its income. The charity should check regularly that it is not exceeding the VAT registration threshold.
But a charity that makes no taxable sales, either because the charity has no business activities or because their sales or income are exempt from VAT, cannot register for VAT.
How VAT affects charities
VAT affects charities in several ways:
- charities receive income from a variety of sources, some of which may be liable to VAT if the charity is VAT registered
- charities will be able to claim relief from VAT on some of the goods and services they buy, regardless of whether the charity is registered for VAT
- many of the goods and services that charities buy will be subject to VAT, regardless of whether the charity is registered for VAT
- charities that are VAT registered may be able to reclaim some of the VAT they’re charged from HMRC
When VAT will be charged
Goods and services are divided into different categories, which determine whether VAT will be charged.
Outside the scope
Certain activities carried out by charities are not covered by the VAT system and are not subject to VAT. An example of outside-the-scope income is a freely given donation where the donor gets nothing in return for their money. A typical example of an outside-the-scope expense is the payment of employees’ wages.
These are goods and services that are standard-rated, reduced-rated, or zero-rated when sold by a business, which could include a charity, that’s registered for VAT:
- the standard rate is charged on most goods and services
- the reduced rate is charged on goods and services listed in Schedule 7A to the VAT Act, examples include children’s car seats and domestic fuel and power
- the zero rates apply to goods and services listed in Schedule 8 to the VAT Act, examples include food, books, and passenger transport
Some goods and services are exempt from VAT when sold by a business, which could include a charity. This means that no VAT is payable, but, equally, the organization making the supply cannot normally reclaim any of the VAT on the related expenses, see paragraph 3.7.3 for more information.
Goods and services that are exempt from VAT are listed in Schedule 9 to the VAT Act. Examples include insurance and health care.
VAT that charities must charge
A VAT-registered charity must charge VAT on all the standard-rated and reduced-rate goods and services they sell. The charity does not charge VAT on any income from non-business, zero-rated, or exempt sales. The treatment for VAT purposes of some activities commonly carried out by charities can be found in section 5.
VAT that charities must pay
A charity will pay VAT on all standard-rated or reduced-rate goods and services they buy from VAT-registered businesses.
VAT-registered businesses can sell certain goods and services to charities at a reduced rate or zero rates. See section 6 for more information.
VAT that a charity can reclaim
A charity needs to consider the VAT on its expenses in 3 stages.
Stage 1, non-business (outside the scope)
A charity cannot reclaim any VAT it is charged on purchases that directly relate to non-business (outside the scope) activities. Section 4 gives further advice on how to decide if a charity’s activities are non-business.
Once a VAT-registered charity has decided which of its activities are non-business it will also have to consider how much of the VAT on its general expenses (such as telephone and electricity) relates to those activities. The charity will not be able to reclaim the proportion of VAT that relates to non-business activities. There are several methods a charity can use to calculate this proportion. Some methods are detailed in the VAT guide (VAT Notice 700). VAT that the charity establishes as relating to its business activities is input tax.
Stage 2, taxable sales
A VAT-registered charity can reclaim all the input tax it is charged on purchases that directly relate to taxable goods or services it sells.
A charity that is not VAT registered will not be able to recover the VAT it is charged on standard-rated or reduced-rate goods it buys from VAT-registered businesses.
Stage 3, exempt
A VAT-registered charity cannot reclaim the input tax it has been charged on purchases that relate to exempt activities unless these are below a set level (known as the de minimis limit).
To determine whether a charity is below the de minimis limit in any VAT accounting period or tax year it needs to:
Calculate the input tax that directly relates to exempt activities.
- Calculate the proportion of input tax on general expenses (after adjustment for non-business activities), such as phone and electricity, that relates to exempt activities.
- Add the 2 amounts together.
- If the total exempt input tax is below the de minimis limit, then the charity can reclaim it. For details of the current de minimis limit and further information on how to calculate the proportion of VAT reclaimable see Partial exemption (VAT Notice 706).
Accounting for VAT
At set intervals, normally every 3 months, a VAT-registered charity will complete a VAT Return. This details the VAT the charity has charged on sales of standard-rated and reduced-rate goods and services, and the VAT it has paid on goods and services it has bought that relate to taxable sales.
If the VAT on the charity’s sales is more than the VAT on its purchases the charity must pay the excess to HMRC. But if the VAT on the purchases is more than the VAT due on the sales the charity can reclaim the difference from HMRC.
There are several different accounting schemes available for VAT-registered businesses including monthly accounting, cash accounting, and annual accounting.