Is it a donation or sponsorship, or both?

July 17th 2019

HMRC has recently updated its guidance about when a payment to a charity could comprise of two different elements, with different VAT outcomes for each part. What opportunities does this create for both charities and sponsors? John Craig looks at the change and how this might affect you.

HMRC’s approach to philanthropy is very clear, if your business donates money to a charity or not-for-profit organisation and only receives a small acknowledgment in, for example, an annual report or event programme, then your payment is not relevant to a taxable supply of goods or services. It is outside the scope of VAT because no supplies of goods or services have been provided by the charity.

However, if you obtain worthwhile benefits such as advertising or marketing promotion, then the payment will be subject to VAT (if the charity is registered) as sponsorship income.

However, if you are charged VAT by a charity, make sure that you get a proper VAT invoice from it to support your input tax claim and check that the narrative refers to sponsorship or advertising, rather than a donation. HMRC might disallow your input tax claim if it considers that VAT has been incorrectly charged by the charity because of the term ‘donation’ being used on the invoice.

ABC Company pays £2,000 to a local charity, in return for which it will get an advert in the charity’s annual report and one of the directors can also give a presentation about its services at the charity’s AGM. If the charity is registered for VAT, the payment will be subject to VAT at 20%. ABC’s business is partially exempt, so it will not be able to fully claim input tax on the payment.

JRW Advice
It might be better for ABC to make a presentation at a fundraising event organised by the charity rather than at its AGM. Income earned by a charity or non-profit making organisation from a fundraising event is exempt from VAT in most cases.

New HMRC policy
HMRC has revised its policy to recognise that some charitable payments made by a business consist of both a sponsorship benefit and a donation. For example, the £2,000 payment made by ABC in the previous example might not be a reasonable rate for sponsorship if only five people attend the charity’s AGM.

The challenge is to ensure that any donation you make is completely separate from any sponsorship agreement. Ideally, you should make two separate payments to the charity and only the sponsorship payment will be subject to VAT.

JRW Advice
It is important that any benefits you receive as a sponsor are not conditional on the making of the donation or gift. The sponsorship agreement should make this clear. The value of the sponsorship should fairly reflect the benefits that you receive.

Most charities have an input tax restriction on their expenses because they often have both exempt income and non-business activities. It is therefore in the interests of a charity to encourage sponsorship income rather than donations, assuming the sponsor can fully claim input tax on its own expenses, unlike ABC Company in the example above.

If your business cannot fully claim input tax, check if any charitable payments you make for sponsorship can be partly treated as a donation. Ensure that you make two separate payments and that the charity raises a VAT invoice solely for the sponsorship element of your support.