New VAT guidance from HMRC if you give or get sponsorship

HMRC has published an updated VAT Public Notice 701/41 on sponsorship and donation.

Mixed sponsorship and donations

Charities will often receive both sponsorship and donation income at the same time. There is no requirement to account for VAT on the donation, provided that the donation is entirely separate from the sponsorship agreement, or that the sponsorship agreement makes clear which part is payment for services, and which is a donation. However, it must be clear that any benefits the sponsor receives are not conditional on the making of the donation or the gift.

What is outside the scope of VAT?

Where a charity (or other non-profit making body) agrees to let a commercial business use its name in order to raise donations, there is a supply of the benefit to the commercial business of increasing sales. However, there is no need for all the payments to be assumed to be made in return for the benefit. The value of that benefit must be calculated and a fair value stipulated in the contract. The remainder can be treated as a donation from the commercial business to the charity and is outside the scope of VAT.

By way of an example, a retailer may allow customers to vote between charities to receive donations from them. This might then result in slightly increased sales for the retailer but it is not seen as commercial sponsorship because any benefit received by the retailer may be seen as insignificant. Consequently, the payments received are regarded as outside the scope of VAT.
Charities often enter into two agreements with corporate sponsors when entering into ‘charity of the year’ or similar arrangements.

1. The first is between the charity’s subsidiary and the sponsor over the granting of publicity rights.
2. The second is between the main charity and the sponsor to receive the donation.

In the second case, the donation will be outside the scope regardless of whether a minimum donation is promised.

A further variant on the ‘charity of the year’ approach is that the business agrees to promote giving by its employees and customers to the charity. In this case, none of the donations by employees of the business and customers will be treated as consideration for a taxable supply.

Does this impact you?

It would be prudent based on this newly published guidance for charities to check that their commercial agreements clearly distinguish where an amount is received without a supply being made in return.

Please contact Robert Warne if you would like to discuss your position further.