Input tax and donations
The VAT rules only permit your business to reclaim input tax (VAT paid on purchases) where the expenditure is linked to VATable supplies (sales) it makes. In other words, your business must be VAT registered and the purchase on which you paid VAT must have a clear connection with the business activity.
Example 1 – Your business provides equipment to a local sports club with no requirement that it pays for it with money or other “consideration”. You aren’t entitled to reclaim the VAT paid on the purchase of the equipment. Even a mention of your generosity at the club’s AGM won’t be enough to legitimately say that the equipment was a sponsorship arrangement to promote or advertise your business. The equipment is therefore a donation and so outside the scope of VAT.
VAT in and outs
If your business receives move valuable benefits, e.g. advertising on billboards etc. at the club’s events, VAT can be reclaimed for the cost of providing it with equipment as there is a supply of goods for consideration. However, even though the club etc. is treated as making a VATable supply to you of advertising services, unless it is VAT registered it won’t (can’t) charge you VAT. However, this doesn’t leave you any better off.
Trap – Where you give goods or services to a charity etc., you must account for the VAT of their value.
Example 2 – Acom Ltd donates equipment for which it paid £3,000 (including £500 VAT) to a local charity which isn’t VAT registered. It provides little or no goods or services in exchange. While Acom can reclaim the £500 VAT on the purchase of the equipment it has gifted to the charity, it must account to HMRC for the VAT on its value, i.e. £500 (£2,500 x 20%). The arrangement is therefore VAT neutral.
VAT on donations mixed with supplies
The position is different if what you receive, e.g. advertising services, from a charity etc. is worth something but not of equal value to what you supplied.
In this situation you can treat the arrangement as part donation and part VATable supply. Following HMRC’s change of policy on this in May 2019, attributing separate values to each element can reduce your VAT cost.
Tip – Where you make payments or supplies in kind, e.g. equipment, to a charity etc. partly as a sponsorship deal and partly as a donation, only the former is liable to VAT.
Separate arrangements – If a donation is made separately from sponsorship, or your sponsorship agreement document makes clear which part is payment for services and which is a donation, you do not need to account for VAT on any donation or gift of goods as per Example 2.
Tip – Make sure that donations you make are clearly recorded separately from any sponsorship agreement you have with the same organisation.