Some particular activities

Contents

23. Tax. Sale of donated goods

Many charities raise funds by selling donated goods, such as clothes or bric-a-brac. This may be a regular activity carried on at a shop or market stall, or it may be an occasional activity carried on at a jumble sale or auction. At first glance this may appear to be a trade similar to the retail sale of goods by other commercial businesses. But the way in which the goods are acquired makes it different from most retail trades.

Traders usually sell goods that they have manufactured, or have purchased for resale; they do not usually receive goods by way of donation as charities do. For the charity it is simply a realisation of the value of a gift. For this reason the sale of donated goods is generally not regarded as a trade for tax purposes.

This is so even where the donated items are sorted, cleaned and given minor repairs. If the goods are subjected to significant refurbishment or to any process which brings them into a different condition for sale purposes than that in which they were donated, the sale proceeds may be regarded as trading income. For example, where donated cloth is made into garments for sale this will amount to a trade.

24. VAT. Sale of donated goods

The sale of both donated and bought in goods by a charity is always a business activity for VAT purposes.

The sale of donated goods by a charity is zero-rated provided all the related conditions are met. The zero-rating applies exclusively to goods and does not apply to services. Neither does zero-rating apply to items deemed to be goods in other sections of the VAT law, for example, zero-rating does not apply to any land or buildings donated to and sold by a charity.

The goods can be new or secondhand, but must have been donated to the charity. V1-9 Charities explains the conditions attached to this VAT relief.

25. Tax. Profits from lettings

All rental income from land or buildings, received by a charity, is exempt from tax provided the profits arising are applied for charitable purposes. See the guidance at paragraph 11 Tax exemptions

However, if services are provided along with the use of the land or buildings (for example, provision of a caretaker, food or laundry) these services in themselves might amount to trading. Letting activity will itself constitute a trade where the owner remains in occupation of the property and provides services over and above those usually provided by a landlord. Essentially the distinction lies between the hotelier (who is carrying on a trade) and the provider of furnished accommodation (who is not). An important difference is that in a hotel etc. the occupier of the room does not acquire any legal interest in the property. Each case must be considered on its own facts.

26. VAT. Property lettings

The income from property lettings is always business income for VAT purposes and therefore falls within the scope of VAT.

The rules governing the VAT liability of property lettings are not straightforward. You should therefore refer to VAT notice 742: Land and Property, or guidance at V1 - 8 Land and Property or if still not sure phone the HMRC Charities Helpline on 08453 02 02 03 - Monday to Friday 8 am to 6 pm.

27. Tax. Business sponsorship

It is common for charities to enter into sponsorship arrangements with businesses in order to raise funds. Business sponsors may fund the general work of the charity or a particular charitable project. Sponsorship arrangements often link the name of the business with the charity or its project, creating in the minds of the public an affinity between the business and the charity. The affinity with charity created by sponsorship is a valuable marketing asset for businesses.

28. Tax. Is sponsorship income trading income?

The tax treatment of payments received by charities under sponsorship arrangements will depend on the nature of the arrangement. Just because a sponsor derives good publicity or public relations benefits from payments to charity, does not automatically mean that payments by the sponsor are trading income in the hands of the charity.

If the charity does not provide goods or services in return for payment, sponsorship payments will normally have the character of charitable donations rather than trading income in the charity's hands. The fact that the business sponsor takes steps to publicise or exploit the affinity with the charity will not change the treatment of the payments in the hands of the charity, unless the charity also publicises the affinity itself.

If, before payment is made by the business sponsor, a commercial participator agreement (required by the Charity Commission under Section 59 of the Charities Act 1992 or by the Office of the Scottish Charity Regulator under S81 Charities and Trustee Investment (Scotland) Act 2005) is in place, the tax treatment of the payment will be determined by the wording of the agreement, if it is adhered to. Otherwise, the tax treatment of the payments will be determined on the particular facts of the case.

29. Tax. What if the charity provides goods or services to the sponsor?

If the charity provides some goods or services in return for the sponsorship payments they may be treated as trading income. Most commonly a charity will play a part in publicising the business sponsor's affinity with the charity by including references to the sponsor in publications, posters, etc. and at events organised by the charity. Provided that such references amount to no more than acknowledgements of the sponsor's contributions they will not cause the payments to be regarded as trading income. However, references to a sponsor which amount to advertisements will cause the payments to be treated as trading income. HMRC Charities will regard a reference to a sponsor as an advertisement if it incorporates any of the following:

  • large and prominent displays of the sponsor's logo,
  • large and prominent displays of the sponsor's corporate colours, or
  • a description of the sponsor's products or services.

For example, if a project organised by a charity is sponsored by a well-known company, and acknowledgement of the support of this company is in the form of its name and logo inserted in the corner of a project report, this would not be considered to be advertising. However, if the name and logo was substantially and widely displayed throughout the report, this might be considered to be advertising in return for the sponsorship payment.

There are other services that a charity might provide in return for sponsorship payments that will be factors in determining whether the payments are trading income. Examples of such services are:

  • use of the charity's mailing list
  • use of the charity's logo
  • endorsement of the sponsor's products or services
  • links to the sponsor’s sales website from the charity’s own website
  • exclusive rights to sell goods or services on the charity's premises.

30. Tax. When is a sponsorship arrangement primary purpose?

Once it has been determined that sponsorship payments are trading income in the charity's hands the next step is to consider whether the sponsorship arrangement falls into the primary purpose or non-primary purpose parts of the charity’s trade.

It is recognised that where a sponsor’s funding is tied to a particular event or project, it may not be practical to confine the charity’s response to a mere acknowledgement. However, any arrangement in which the charity's response is on such a scale that it appears to be a main purpose of the donation may be challenged. In such a case, HMRC will want to consider the possibility of non-primary purpose trading by the charity and whether there has been a breach of the donor’s benefits limits.

Examples

Example 1

A charitable theatre group’s production is sponsored by a local business ‘X’. X’s logo is placed discreetly within the event program. An executive of X appears on stage on the final night and is thanked. One sign of moderate size is positioned prominently in the hall stating that the event is sponsored by X.

In this case it could not reasonably be argued that a main purpose of the production is advertising X, and there would be no loss of direct tax reliefs for charity or donor.

Example 2

An arts organisation’s broadcast national awards ceremony is sponsored by a nationally well-known brand ‘Y’. The event is named ‘The Y Awards’, which brings Y’s name up on television frequently in trailers and program breaks. Y’s logo features prominently in the program. An executive of Y appears on stage and thus on television and is thanked. There are many prominent signs advertising Y in the venue.

In this case it could reasonably be argued that a main purpose of the event is advertising Y, and there is the possibility of a loss of direct tax reliefs for charity and donor.

31. Tax. Payments for use of a charity's logo

Where a charity allows its logo to be used, in return for payment, by a business as an endorsement for one or more of the business' products or services, and the charity likewise promotes the endorsement in its own literature, the payments are likely to be trading income of the charity.

Payments solely for the use of a charity's logo may in the charity’s hands may not be trading income.

The position for charitable trusts and for charitable companies where the logo came into existence prior to 1 April 2002 is -

  • A one off payment (received without any deduction of tax). The income is charged to tax as miscellaneous income or Schedule D Case VI income and no exemption is available apart from the small trading exemption under S46 FA 2000.
  • Annual payments. The income is charged to tax as investment income or Schedule D Case III income. Exemption is available under S505 (1)(c)(ii) ICTA 1988. If income tax is deducted by the payer then repayment can be claimed, provided the income is applied solely for charitable purposes. However, where the payer is a UK company, payment can be made without the deduction of income tax provided the payer reasonably believes that the recipient is a charity (S349A and S349B ICTA 1988 refer).

Whether payments for use of the logo are considered to be annual payments will depend on the precise terms of the agreement for the use of the logo. The payments must be made under a legal obligation, recur each year and be a pure donation in the hands of the charity.

For charitable companies, where the logo came into existence on 1 April 2002 or later, Schedule 29 FA 2002 applies. A logo is an 'intangible fixed asset' for the purpose of Schedule 29. A related non-trading gain would normally be charged to tax under Case VI of Schedule D. However non-trading gains on intangible fixed assets received by charitable companies are exempted from tax under Case VI, by

S505 (1)(c) ICTA 88, as long as the gains are applied charitably.

32. VAT. The VAT treatment of business sponsorship and payments for the use of a charity’s logo

The VAT treatment is different from the tax treatment.

Where a sponsor receives any benefits in return for a sponsorship payment all of the payment for the sponsorship is consideration for a taxable business supply for VAT purposes.

However it is recognised that there will be situations where the “benefit” amounts to no more than a mere acknowledgement of support, given gratuitously by the charity to the sponsor and is not directly linked to the payment made by the sponsor. Where this is the case the payments are considered to be a donation and therefore outside the scope of VAT. Some examples of such benefits are:

  • a flag, or sticker received in return for a donation
  • the sponsors name being included in a list of supporters in a programme, or on a notice
  • naming a building or university chair after a donor
  • putting the donor’s name on the back of a seat in a theatre.

The granting of the right for a sponsor’s logo or name to appear in a charity’s publication or on their website is a supply of services for VAT purposes. It is the granting of the right that triggers the taxable event for VAT purposes rather than any activity (or lack of it) undertaken by the charity or the size and/or prominence of the logo. The same principles apply when a charity grants the right to a business sponsor to use the charity’s logo.

33. VAT. Can a charity apportion a payment in respect of donational elements for VAT purposes?

VAT law only allows apportionment of single payments in relation to different supplies of goods or services. Therefore a single payment that is said to cover both a right to use a logo and a donation cannot be apportioned as a donation is not a supply for VAT purposes. VAT will be due on the whole of the payment. The mechanism described in Paragraph 27 above allows for separate VAT treatment when there is a clearly identifiable consideration for a supply for VAT purposes and a separate clearly identifiable donation.

34. VAT. What is the VAT position of donations in addition to sponsorship/logo payments?

If a donation is given in addition to the sponsorship payment this may be excluded from the taxable amount, provided that it is clear from any agreement that the donation is entirely separate from the sponsorship or the use of a logo and is freely given. If the donation is freely given but on condition that a further benefit is provided, it is further consideration for a taxable supply for VAT purposes.

For further information on charity sponsorship and the granting of the right for use of a logo, please guidance at see guidance at V1-3 Supply and consideration and VAT notice 701/41 - Sponsorship.

35. VAT and tax. Affinity credit cards

A charity may receive payments from a bank, building society or other financial institution in return for the charity endorsing that institution’s credit card and recommending its use to the charity’s members or supporters. Such cards are normally referred to as “Affinity Credit Cards”.

This is a business activity of marketing services by the charity and VAT is due on any amounts they receive in respect of such activity. However there is an Extra Statutory Concession that allows charities, should they wish to do so, to treat a proportion of the income received as a donation and therefore outside the scope of VAT. For further information regarding this concession please see guidance at V1-9 Charities and VAT notice 701/1 Charities

Treatment for tax purposes is likely to be similar to that for VAT purposes. Any payment accepted as a true donation for VAT purposes would normally be accepted as such for tax purposes. Anything else paid to the charity in relation to the affinity card is likely to be taxable non-primary purpose trading income. It is recommended that separate payments are made under carefully drafted legal agreements, in order to make the position clear. The commercial payment should be at a market rate.