Is VAT payable on charity donations?

January 5th 2024

A trustee of an environmental charity has launched a fundraising appeal to ask for donations from supporters. One tree will be planted in a city centre for each £20 donation. Are the donations subject to VAT as a supply of services?  Naomi Swan explains in this article.

What is a donation?
VAT is not payable on genuine donations that a charity receives from its supporters or other third parties; they are outside the scope of VAT because there is no supply of goods or services taking place. You cannot claim input tax on any costs you incur to raise funds, such as telephone and computer expenses for fundraising staff, because they do not relate to a taxable source of income. However, there can sometimes be borderline situations about whether a donation produces benefits for the donor where output tax might be payable by the recipient.

You should exclude donation income from the output figures of your VAT returns.

HMRC’s manual: five conditions
HMRC’s Supply and Consideration Manual helpfully lists five questions that you should consider if there is any doubt about whether your donations might be subject to VAT:

1. Does the donor receive anything in return for the payment?
2. Are there any conditions attached to the payment that go beyond merely having to mention it in account statements?
3. What will the payments be used for?
4. If the donor does not benefit directly, does any third party receive a benefit?
5. Is there a contract and what are the terms and conditions?

If you answer “yes” to the final question about contracts, that will usually indicate that a supply is taking place, rather than a donation. However, a “no” answer to questions 1 and 4 will usually confirm that the income is a donation.

If a business donor gets worthwhile advertising or sponsorship benefits in return for their payment, this usually indicates that a taxable supply has taken place.

What about the charity trustee above?
The key fact in this example is that the donors have no idea where, or even if, the trees will be planted; they do not get any personal benefits for their payments. For example, if the donors paid, say, £100 to the charity in return for having five trees planted in their garden, this would be a direct benefit to the donor and the £100 payment would include VAT. However, that is definitely not the case, so the donations are outside the scope of VAT.

The charity cannot claim input tax on the costs of buying the trees because they relate to a charitable rather than business activity. There is no direct and immediate link to taxable sales.

When is a donation subject to VAT?
Each donation must be considered on its merits because some donations linked to a specific project could be taxable.

Green Cricket Club has constructed a new pavilion and invited its supporters to pay £100 for a brass plaque to be engraved on the building, which will display the full name of both the supporter and their favourite player. The £100 payments will be taxable because the donor is getting a direct benefit for their payment.

The cricket club can claim input tax on the project costs, e.g. the costs of buying plaques, engraving, fitting and so on.

The tree donors get no direct benefit from their donations, so they are outside the scope of VAT. However, each fundraising project must be treated on its merits, as donors might receive Vatable benefits for their payments in some cases.

For further information or other scenarios please do contact our team.

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