Organizations are increasingly providing goods and services to customers for reduced, or no charge, as a way of helping to support their customers through the challenging times resulting from the Covid-19 pandemic. What many organizations may not be aware of is that there can be value-added tax (VAT) costs associated with these arrangements. This article is intended to help highlight where there can be a need to account for VAT on philanthropic activities, so the VAT position can be factored into the costs of any planned activities.
Free Food and Drink
Many organizations have been offering free goods or services to their customers who are “critical workers.” Examples include free coffees, sandwiches and pizza, but there are many similar offers being made by other companies, be it for critical workers or all their customer base.
The VAT rules treat the free supply of goods as a deemed supply. In general terms, this means that VAT has to be accounted for on the gift, unless the cost of that gift and all other gifts to the same person over the last 12 months is less than 50 pounds ($61). This financial limit should mean that most gifts to consumers will not require the organization to pay VAT on a deemed sale (based on the VAT treatment of the item gifted), but the organization should still monitor the position. If the organization was asked for details, what records would it have to demonstrate that the cost of gifts given to the same person do not exceed the 50-pound limit?
The VAT rules for gifts of services, which broadly speaking are defined as anything that is not tangible goods, are different. Examples include mobile phone data and taxi services.
When an organization provides a service to a customer free of charge, there is usually no supply, so no VAT is due. However, the organization may not be entitled to full recovery of VAT on its costs of providing the free service, as the “gifted” service could be seen to be a non-business activity. This could result in the VAT incurred on the costs of providing the gift being irrecoverable and potentially a wider restriction to VAT recovery on costs such as overheads. Organizations should be aware that there is no equivalent 50-pound rule for gifts of services.
Some organizations are offering discounted prices for key workers and this is usually simpler from a VAT perspective. VAT is payable by the supplier on the consideration actually received. There is usually no question that the supplier is acting “in business” as it is presumably offering the promotion as a way of marketing its goods and services and trying to increase loyalty to its brand. This argument can be used for free supplies, but the absence of any consideration can cause problems.
Fundraising and Sponsorship
Some companies have set up separate foundations to carry out their philanthropic activities. These organizations are largely not registered for VAT as their activities tend not to require or allow them to VAT register. This means that the VAT they incur is generally a cost to them. That said, it is worth the foundation reviewing whether any of their activities do allow them to VAT register in order to benefit from some VAT recovery, or to perhaps consider inclusion of the foundation in the “VAT group” with the trading company.
Many charities and other not-for-profit organizations have been receiving sponsorship and donations for carrying out additional Covid-19 fundraising activities. It is important to note that there is a distinct difference in VAT treatment between the two mechanisms for receiving funds. A donation is a freely given payment that does not relate to a supply of goods or services and so is not subject to VAT. Sponsorship on the other hand, is generally seen as a VAT bearing supply being made to the sponsor of advertising/promotion.
I have routinely observed errors being made when payments are given to charities and other non-profits, where the donor is provided with a service, rather than giving the payment “freely.” A donor can impose conditions on the spending without disturbing the donation/funding characterization of the payment, e.g. it can request that the funds are spent on a specific project or request a report on how the funds are spent. However, conditions beyond these can create a supply of services.
Clearly, applying the incorrect VAT treatment can lead to unwanted VAT consequences for the charity as it is the supplier in the transaction and so is responsible for any VAT that may fall due. Therefore, it is of utmost importance that care is taken to correctly identify the nature of the payment, so that the correct VAT liability is assigned at the outset.
Personal Protective Equipment
A final point to highlight is the VAT treatment of personal protective equipment (PPE). Some organizations have offered this for free, given the significant role it can have in helping to prevent the further spread of the Covid-19 virus.
HM Revenue & Customs (HMRC) recently announced a temporary VAT relief applied to PPE for the Covid-19 crisis from May 1, 2020 until July 31, 2020, removing the VAT charge on these goods so that they fall to be treated as zero-rated. In late May 2020 HMRC announced that they will donate the VAT paid to them in relation to PPE gifted between March 1, 2020 and April 30, 2020: this being the period prior to the zero-rating relief taking effect.
Going forward, the zero-rating change should remove a potential VAT cost for organizations gifting PPE, who prior to the rule change may have incurred VAT on the acquisition of the PPE that could not be recovered. From experience, care is also needed in checking the detail of any PPE that is provided, to ensure that it meets the VAT law definition of products qualifying for the zero rate, otherwise it will be a standard-rated item.
In these uncertain times, many organizations are carrying out philanthropic activities to help their customers and people in need. VAT is a transactional tax, therefore there is a need to consider whether a VAT cost arises as a result of the proposed activities. Knowing this in advance means that the VAT position can be planned for, and not represent a hidden or unexpected cost at a later date.
Robert Marchant is VAT Partner at national audit, tax, advisory and risk firm, Crowe.
The author may be contacted at: firstname.lastname@example.org
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.