ICAS supports extending VAT relief for business donations of goods to charity

Susan Cattell outlines our support for extending a VAT relief for business donations of goods to charity and the key points from our consultation response.

We have responded to an HMRC and HM Treasury consultation on the VAT treatment of business donations of goods to charity.

Currently, VAT relief is available on goods donated to a charity for sale (for example, through a charity shop) but not for goods given for onward donation, or for use in the delivery of the charity’s services. The relief is currently restricted in this way due to concerns about the scope for fraud and abuse. However, the government wants to encourage charitable donations and reduce waste, so the consultation proposed an extension of the relief, if this can be achieved without compromising the security of the VAT system. 

Our response

We noted that if the relief is to fulfil the objectives of encouraging charitable donations and reducing waste, it is vital that the administrative requirements for donor businesses and charities are kept to a minimum. The right balance must be found between limiting the scope for abuse and having a relief that is workable for charities and businesses. 

It would make sense to restrict the relief to registered charities, with a certification system, if this means that the relief could be simpler to operate because there would be fewer concerns about potential abuse. Additionally, we saw some merit in combining this approach with value limits (for goods donated), rather than adopting other more administratively complex options suggested in the consultation which are unlikely to work in practice (for example, limiting the total value of donations received by an individual).

Value limits

We agreed that in many cases - like the example given in the consultation of crates of shampoo - £100 would be a reasonable limit. Where more valuable items are donated to charities (for example, designer clothing and footwear), they would be likely to be sold rather than donated to the charity’s users.

However, a £100 threshold would not be high enough for some charities, for example, charities involved in helping individuals to furnish accommodation. It might also be too low in some cases, where goods are being provided for the charity’s own use, for example, if a business wanted to donate computers for the charity to use itself. 

One possibility might be to have different limits for items to be used by the charity and for items to be donated by the charity to its users, although this could cause some problems in practice. Another possibility could be to set lower value limits for goods regarded as high risk for abuse, if these could be precisely defined.

One disadvantage of value limits would be the need to arrive at valuations and the potential lack of certainty. Possible alternatives should be considered. One option would be to base the value limit on the original purchase price (setting the value limit higher to allow for the fact that the purchase price would generally be higher). Another would be to allow businesses to use the lower of original purchase price and the value on donation.

Items for donation

We didn’t support basing the proposed relief on lists of goods which would be eligible or excluded. This would make it more difficult and burdensome to administer and apply. 

We anticipated that there could also be difficulties providing precise definitions of the categories of goods that would be eligible (or excluded), leading to uncertainty and grey areas. However, the consultation noted that laptops, tablets, and mobile telephones are regarded as particularly high risk for possible abuse of the relief, so these could potentially be treated differently to lower risk donations. They could either be excluded, or subject to a lower value limit. 

Administrative burdens for donors and charities need to be kept to a minimum. Large businesses may be unwilling to undertake extensive sorting of donations. On balance we concluded that value limits (subject to addressing the valuation issues) would be a preferable approach, rather than listing categories of eligible and ineligible items. 

Other issues

We didn’t support restricting relief to goods for distribution to those in need but not for use in the delivery of a charity’s services. As suggested in the consultation this would be very difficult to administer in practice. In many cases, the donor and the charity may not know at the point of the donation whether the goods will be used by the charity or passed on to the charity’s users. It would be preferable to take a broader approach to the intended use of the donated goods.

Similarly, we thought that all registered charities should be eligible (subject to meeting any conditions), ie relief should not be restricted to charities with a poverty relief objective, or to charities whose recipients were in receipt of welfare. 

We also suggested that one option for restricting opportunities for abuse would be to exclude any donations from connected parties from the relief. 

Let us know what you think

We respond to tax consultations and calls for evidence and attend meetings with HMRC at which service levels, delays and other issues you raise with us are discussed. We welcome input from members to inform our work; email us to share your insights and feedback.

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