At a time when charities and businesses are under intense pressure, it is easy to lose sight of tangible wins amid mounting challenges. However, a rare and genuinely mutually beneficial policy reform is now on the horizon!
From 1 April, VAT relief will apply when businesses donate eligible goods to registered charities for free distribution or use in their charitable activities.
The problem
Under the current arrangements, businesses have been required to account for output VAT on donated goods, calculated on their cost value. In practice, this meant that even where no money changed hands, the business was treated as though it had sold the goods and taxed accordingly. While there were exceptions for zero-rated items, most stock did not qualify for relief when donated. Therefore, in some cases, it made more sense to discard surplus stock than to donate it - a clear flaw in the system.
The new approach benefits all parties. Charities gain access to useful, and at times essential, goods at no cost. Businesses can incorporate donations into their stock flow to support important causes without incurring a tax penalty. Government and the wider economy benefit from reduced waste and better reuse of materials.
The details
The key features of the new system include value limits, designed to reduce the risk of fraud:
- £100 per item for most goods
- £200 per item for defined essential goods, such as household appliances and mobile phones
Certain items are excluded, including alcohol, tobacco and vaping products.
To be eligible, recipient organisations must be registered with HMRC for tax purposes and, where applicable, registered with the relevant charity regulator. Further HMRC guidance on administration and record-keeping is expected in due course.
The impact
This reform is expected to unlock tens of millions of pounds’ worth of goods for redistribution to charities at a time of sustained financial pressure. We, alongside the sector, strongly support this measure. It goes without saying this will not solve every challenge charities face, nonetheless it will make a meaningful difference across the sector.
If you have any concerns our questions, as always, please do get in touch.