How to make fully compliant, tax-efficient charitable donations
How do businesses benefit from making charitable donations?
Money donated by a company to charity should be paid gross, before tax is deducted; if made in this way then charitable donations are deductible from the total profits of the business when calculating Corporation Tax.
There are two important points to remember when donating money to charity. First: donated money must not be a distribution of profit such as a dividend. Second: if the business or a person "connected" with the business benefits as a result of giving the donation, the benefit must be below the limits seen in the Table.
|£0 - £100||25% of the donation|
|£101 - £1,000||£25|
|above £1,000||5% of the donation|
Who is seen as a "connected" person?
- The donor’s husband, wife, civil partner or relative, for example a son, daughter or a parent, grandparent or grandchild.
- Any relative of the donor’s wife, husband or civil partner.
- A company under the control of the donor, or under the control of family members as above.
Donations that do not qualify for Corporation Tax Relief:
- Any donation that comes with a condition about repayment.
- Any donation where the company or a person "connected" to it has received a benefit over the values detailed above in return.
- Any donation where a condition or arrangement is made that the charity will purchase property (other than as a gift) from the business or a person connected with the business.
What is Corporation Tax Relief?
When a qualifying donation is made to a charity by a business, the amount paid is treated as a "non-trade charge", which means the company can make a claim on its company tax return to set the amount of the donation against taxable profits.
It’s important to keep records to support entries on the company tax return. All other relevant documentation should be retained as well for at least six years after the end of the accounting period to which they relate as HMRC may query the donation or investigate your company.
Other compliance issues
Charitable donations cannot be used to create or increase the trading losses of the company and cannot be carried over from year to year. If you make a donation of more than your taxable profit, therefore, the excess is not tax effective. If your company is part of a group, the excess can be used as group relief, but the company must be registered in the UK even if it operates abroad.
How to Claim Corporation Tax Relief
The relief must be claimed in the accounting period to which the donation relates.
Sole traders, partnerships and limited companies can all make use of the relief given on trading stock and equipment donations.
Donating trading stock and equipment
It is possible to claim tax relief for making a gift of equipment or trading stock to a charity to reduce taxable profits by the cost of the gift made.
Gifts of company equipment
Equipment must have been in use by the business for it to qualify and must be considered as plant and machinery for capital allowance purposes. Equipment includes office furniture, computers, printers, vehicles, tools and machinery.
The trading stock is anything the company makes or sells. The business can claim the cost of these goods on its accounts but will not have to include anything in the sales income for the value of the gift.
Personnel "secondment" / and volunteering
Tax relief can be claimed for the costs of temporarily transferring an employee to work for a charity on "secondment". If a business lends or temporarily transfers an employee to work for a charity, the cost of wages, employer’s NI and any business expenses can be set against taxable profits. To make this work, the business must still be paying the employee and continue to operate PAYE on the person’s wages even when they are seconded.
Much the same applies for employees volunteering in work time; businesses can continue to claim tax relief for their salary and employer’s national insurance, and the costs can still be treated as a business expense when calculating the chargeable profits of the business.
A note on VAT
If a business buys goods specifically to donate to charity then the purchase is not treated as a business activity for VAT purposes and the VAT on the items that were purchased to give away does not need to be accounted for. However, for VAT-registered businesses, the VAT paid when the goods were bought cannot be reclaimed, because the goods were not bought for business purposes.
VAT and donations of trading stock
If the goods donated to charity by the business are trading stock, that is, what the business makes or sells, it will count as a taxable business supply for VAT purposes. If the company is VAT-registered, the VAT on the goods donated must be accounted for at the appropriate rate, depending on what the items are (standard (20 per cent), reduced (5 per cent), or zero rated).
How to avoid VAT on donations of trading stock
The donation will be zero rated (even if the goods are standard-rated or reduced-rated normally) if the gift made to the charity is specifically in order that the charity can sell, hire out, or export the goods. If that is the case, then VAT on the purchase of the trading stock, which is then donated by a VAT-registered company to a charity for resale, hire or export, can be reclaimed by the company.
So what are the benefits to business of making charitable donations?
To conclude, making charitable donations of money, stock, equipment or personnel can lower your tax bill and might even be seen as a good way of efficiently disposing of end-of-line stock. But there is another important benefit: associating your business with good causes and/or the local community, thus visibly operating a policy on corporate social responsibility, can be very good for business!