HMRC have announced a consultation will be launched before the 23 July 2024 into a new VAT relief for goods donated, by businesses, directly to the end consumers.
Currently, a business is able to zero rate the goods it donates to charities who sell on those goods for charitable purposes. However, when a business makes a direct donation to a consumer (end user), it must account for VAT on the sale at open market value, even though no funds are received in exchange for those goods.
The reason for this, is because, when goods are given away to an end consumer, whether for charitable purposes or not, it is still considered a supply for VAT purposes and, therefore, must be treated as though it were sold at the open market value. This prevents businesses from giving away freebies (VAT free), in order to advertise and market themselves.
However, there is no distinction made between handing out freebies for marketing purposes and donating goods to a person in need. The result of which has created a distortion. A business looking to do something that aligns with its social responsibility, would still have to account for VAT on this activity.
The consultation, a result of lobbying by the British Retail Council and the Confederation of British Industry, means that HMRC will now consider the impact zero rating these donated goods will have on the UK VAT system and aim to identify in what ways this new relief could be beneficial and, the ways on which it could be open to abuse.
Whilst it is unlikely that we will see businesses giving away high end goods, the new relief will have to have some parameters placed on it in order to ensure that it is being used for its intended purpose. Low value goods that are essential for every day life such as toothpaste, cleaning products and washing detergent, would certainly benefit from the relief. But again, parameters must be placed, and hopefully, the consultation will iron all of this out.
VAT in the charity and not for profit sector is not without it’s complexities on a day to day basis. If your organisation would like specialist VAT support then do contact the Indirect Tax Team.
This article is for information only and specialist advice should always be sought on specific issues.
