Some charities or Community Amateur Sports Clubs (CASCs) raise funds by selling donated goods such as clothes. This may be a regular activity carried out at a shop, or it may be an occasional activity carried out at a charity auction. Donations of goods for sale in this way do not qualify for Gift Aid. Gift Aid applies only to gifts of money.
However, your charity or CASC can offer to act as an agent for its supporters and sell goods on their behalf in the hope that the owner will donate the sale proceeds. Any donation of the sale proceeds, less any commission charged, could then qualify for Gift Aid. This type of arrangement is often called 'Retail Gift Aid'.
This guide explains how Retail Gift Aid works and gives links to information on how to operate a Retail Gift Aid scheme.
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In order for any eventual donation of sale proceeds by the owner of the goods to qualify for Gift Aid, your charity or CASC must be acting as an agent, selling goods on their behalf. The following rules must apply:
There are three ways of operating 'Retail Gift Aid'. These are known as the 'Standard Method', 'Method A' and 'Method B'. Full details of how each method works, and any conditions your charity or CASC needs to meet in order to operate the scheme are provided in HM Revenue & Customs (HMRC) detailed guidance on Retail Gift Aid.
If you want to claim Gift Aid in this way you must read the detailed guidance notes to make sure you meet the conditions of the scheme.
Even in situations where your charity or CASC can reclaim Gift Aid, you may have other tax obligations.
Your charity or CASC may be liable to pay tax on the profits of any trading activity. If goods are sold on behalf of a third party (the potential donor) in return for a commission, your charity or CASC is providing a service in return for payment. That service is a taxable trading activity and any profit is potentially liable to Corporation Tax or Income Tax.
Any commission paid to your charity or CASC by the owner doesn't qualify for Gift Aid, as it is a payment in return for services, not a gift.
All costs incurred in selling goods, for example advertising costs or insurance cover for valuable goods (including any share in overheads) is considered to be non-charitable expenditure, and may affect your charity's or CASC's entitlement to tax exemption.
Charities may want to consider using a subsidiary company to act as the selling agent so that charitable funds are not put at risk. If the subsidiary company makes any profits it can pass these to the charity and claim a deduction against its taxable profits. A subsidiary company has to be used if you want to adopt 'Method B' when operating Retail Gift Aid.
If you sell goods on behalf of somebody else and you don't charge them a commission you are not carrying out a business activity for VAT purposes (as you are doing something for no charge). This means that you can't recover any VAT you are charged on your costs, including overheads, relating to this activity of selling goods on behalf of others.
If you do charge a commission for selling the goods, you are carrying out a business activity and this commission income will need to be taken into account when considering whether you are liable to be registered for VAT.
Even if you are not paid in money - for example, you may instead receive some goods or services in return for selling the goods for the individual - this may still be a business activity on your part.
If you are VAT-registered you will have to account for VAT on your commission charges. You will, however, be able to recover any VAT you are charged on costs relating to the sales of the goods on behalf of others, subject to the normal VAT rules.
For more help you can contact the Charities Helpline.