Some particular activities


17. Direct tax: sale of donated goods

Many charities raise funds by selling donated goods (items gifted to a charity which the charity sells on its own behalf), such as clothes, books or bric-a-brac. This may be a regular activity carried on at a shop 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 the sale proceeds are 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.

18. 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 qualifying conditions are met. The goods can be new or secondhand but must have been 'donated' to the charity or its trading subsidiary. It follows that zero-rating does not apply to goods that are sold on behalf of a supporter where the supporter has the option of donating the net proceeds of sale to charity under Gift Aid. The zero-rating applies exclusively to the sale of goods and does not apply to donated 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.

Read about the conditions for zero-rating the sale of donated goods in paragraph 5.5 of VAT Notice 701/1 Charities

19. Direct tax: profits from lettings

All rental income received by a charity from land or buildings is exempt from tax provided the profits arising are applied for charitable purposes. See the guidance at paragraph 5 Direct 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.

20. VAT: property lettings

The letting of land or buildings for a fee is normally a business activity for VAT purposes. The supply is normally exempt from VAT. However, in some circumstances a landlord can 'opt to tax' if he wishes.

See the guidance on hiring out buildings in paragraph 5.11 of VAT Notice 701/1 'Charities'.

Detailed guidance on the VAT liability of land and property is contained in VAT Notice 742 'Land and Property'.

Guidance on 'opting to tax', and the circumstances in which the option does not apply, is contained in Notice 742A 'Opting to tax land and buildings'.

The rules governing the VAT liability of property lettings are not straightforward. If, after reading the guidance, a charity is still unsure about a supply it is making or receiving, it can contact the Charities Helpline on Tel 0845 3020203.

21. Direct 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.

22. Direct tax: is sponsorship income trading income?

The direct 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 itself 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 Section 81 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. Otherwise, the tax treatment of the payments will be determined on the particular facts of the case.

HM Revenue & Customs (HMRC) has agreed the Charity Commission guidance on whether university research paid for by a sponsor is charitable. Other charities may also find this guidance helpful.

Download ‘Research by Higher Education Institutions’ on the Charity Commission website

23. Direct 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 mean the payments are 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
  • 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 constitute 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

24. Direct tax: when is a sponsorship arrangement charitable trading?

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 charitable or non-charitable 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, HMRC may challenge any arrangement in which the charity's response is on such a scale that it appears to be a main purpose of the sponsor making the donation. In such a case, HMRC will want to consider the possibility of non-charitable trading by the charity and, where the donor has claimed tax relief on the payments, whether there has been a breach of the donor's benefits limits.


Example one

A charitable theatre group's production is sponsored by a local business 'TaxCo'. TaxCo's logo is placed discreetly within the event programme. An executive of TaxCo 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 TaxCo.

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

Example two

An arts organisation's broadcast national awards ceremony is sponsored by a nationally well-known brand 'CarCo'. The event is named 'The CarCo Awards', which brings CarCo's name up on television frequently in trailers and program breaks.

CarCo's logo features prominently in the program. An executive of CarCo appears on stage and thus on television and is thanked. There are many prominent signs advertising CarCo in the venue.

In this case it could reasonably be argued that a main purpose of the donation is advertising CarCo, and there is the possibility of a loss of direct tax reliefs for charity and donor (although the donor may be able to claim all or part of their payment as a business advertising expense).

25. Direct 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's 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 not be trading income in the charity's hands.

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

  • A one-off payment (received without any deduction of tax). The income is charged to tax as miscellaneous income and no exemption is available apart from the small scale trading exemption.
  • Annual payments. The income is charged to tax as miscellaneous income. Exemption is available under section 488(3)(b) CTA 2010 (for corporate charities) and section 536(3)(c) ITA 2007 (for charitable trusts).. If Income Tax is deducted by the payer then repayment of the tax can be claimed, provided the income is applied solely for charitable purposes. However, where the payer is a UK company, the payment can be made without the deduction of Income Tax provided the payer reasonably believes that the recipient is a charity (sections 930 and 936(2)(d) ITA 2007).

Whether payments for use of the logo are annual payments will depend on the precise terms of the agreement for the use of the logo. If they are annual payments then 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 only, where the logo came into existence on or after 1 April 2002 the logo is an 'intangible fixed asset' within section 713 CTA 2009. Exemption from tax is available for related non-trading gains received by charitable companies  from intangible fixed assets tax under section 488 CTA 2010.

26. VAT: the VAT treatment of business sponsorship and payments for the use of a charity's logo

The VAT treatment is different from the direct tax treatment.

Generally, if a charity receives sponsorship or another form of support it will normally be making a taxable supply for VAT purposes if, in return, it is obliged to provide the sponsor or supporter with a significant benefit.

In some cases the benefit may amount to no more than a simple acknowledgment of support and could not be considered to be a supply for VAT purposes. Guidance on what HMRC considers to be significant benefits and what HMRC recognises as insignificant acknowledgments can be found in paragraphs 2.1 and 2.2 of VAT Notice 701/41 'Sponsorship'.

Where the benefits are such that they are not simple acknowledgments of thanks but are tangible benefits then the payment is consideration for those supplies and VAT will be due on the full payment received. You will also find guidance on this in paragraph 5.9.5 of Notice 701/1 'Charities'.

If a charity grants the right to another party to use the charity's name and logo in return for a payment the charity is making a taxable supply for VAT purposes. It is the granting of the right that is the taxable supply, rather than any activity (or lack of it) undertaken by the charity or the size and/or prominence of the logo. The same principle applies when a charity grants the right for a sponsor's logo to appear in the charity’s publication or on the charity's website.

27. VAT: can a charity apportion a payment in respect of donation elements for VAT purposes?

VAT law only allows apportionment of single payments when they are made in relation to different supplies of goods or services. Therefore a single payment covering both a right to use a logo and a donation cannot be apportioned because a donation is not a supply for VAT purposes. VAT will be due on the whole of the payment.

If a sponsor wants to make a voluntary donation in addition to a sponsorship payment, it must be clear from any agreement that the donation is entirely separate from the sponsorship payment (ie, the payment made in return for a supply) and it 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.

28. VAT and direct 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 supply of marketing services by the charity and VAT is due on any amounts they receive in respect of such supplies.

However, a charity may have an arrangement with the bank whereby it enters into separate agreements. One agreement could be for the supply of marketing services by the charity to the bank for an agreed consideration. This is a taxable supply on the part of the charity and VAT is due on such payments. The other, separate agreement provides for the bank to make voluntary contributions to the charity. The contributions may often be based on how often the card, usually associated by the bank with the charity’s name and logo, is used. In essence, the nature of the second agreement is that the payments are not made in return for a supply. These contributions are outside the scope of VAT.

Treatment for direct tax purposes is likely to be similar to that for VAT purposes. Any payment accepted as a genuine donation for VAT purposes would normally be accepted as a donation for tax purposes. Anything else paid to the charity in relation to the affinity card is likely to be taxable non-charitable 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.