Can price increases qualify as a donation to charity?

Your business wants to support a charity by increasing the price of all goods by £1 and donating the extra money to the charity. You will advertise the reason for the increase, but how should you account for VAT? Charity expert Bob Johnstone takes a closer look.

What is a donation?
HMRC’s guidance about VAT and charities gives a clear definition of a donation and its VAT status:

“A donation is outside the scope of VAT provided that it is freely given, with nothing supplied in return. VAT will not have to be accounted for on any monies received.”

The challenge with a £1 price increase is to decide which of the following situations applies:

Outcome 1 – The customer is paying £1 extra for your goods and if the goods are standard-rated, the extra £1 includes VAT, i.e. it is a price increase.
Outcome 2 – The customer knows you will donate the extra money to charity, because you are advertising the fact, so the £1 increase is outside the scope of VAT.

A possible solution might be to only increase the price of any zero-rated goods. The VAT problem has gone away.

Customer choice
The reason that your price increase is not a donation is because your customers do not have a choice about whether they pay it or not.

For example, if you trade as a DIY store and the price of a brush is now £7.99 instead of £6.99, your customer cannot pay £6.99. The fact that you have advertised the purpose of the increase in your store or on your website is irrelevant.

The commercial reality is that your business has made a sale of goods for a fixed price and then made a post-transaction decision to donate some proceeds to a charitable project.
You should record the full value of the sales in the outputs box of your returns, including the extra payments.

A different approach?
An alternative strategy that has been successful for many businesses (including the major supermarkets) is to ask customers to round up their payment to the nearest pound when they buy goods or services. This option is usually given at the time when the customer makes a payment on either their debit or credit card or a cash payment to the cashier. In both cases, your customer must have the choice of saying “yes” or “no” to the extra payment. If “yes” is selected, the amount will be outside the scope of VAT.

Alternatively, you could propose adding a fixed amount of money to each sale, with a clear message shown on the debit/credit card payment machine:

“Would you like to increase your payment by £0.50, which we will donate to our local children’s charity? If so, press the green button to accept.”

The same outcome applies if your business includes a “discretionary service charge” on an invoice or bill, perhaps if you trade as a restaurant. The word “discretionary” means optional and therefore the extra payment by your customers is not subject to VAT.

But if you collect donation money, your accounting system must be able to keep the extra money separate from your daily gross takings figures, so that there is a clear audit trail.

IN SUMMARY
If your customers cannot refuse the extra payment, it is not a donation but an additional payment for goods and is subject to VAT. For donations, your customers must be able to accept or reject the payment and know that it will support a charity.

Contact the JRW Hogg & Thorburn team to discuss this further and any other related questions you may have.