The Treasury has opened a consultation on plans to introduce a new VAT relief on goods that businesses donate to charities.
Its consultation proposes a new tax relief on eligible goods that charities give away free or use in the delivery of their services.
The Treasury said it recognises that the current VAT rules, which relieve VAT on goods donated to charity for sale but not onward donation or the delivery of services, “aren't aligned”.
“These rules were designed to protect against fraud in the VAT system,” it said in the consultation.
“We’re exploring options to align the rules without compromising the security of the VAT system.”
The previous government originally scheduled a consultation on a new VAT relief on donated business goods last year, but it was not launched before the general election.
Charity membership bodies including the Charity Finance Group (CFG) welcomed the consultation, saying that it is a change for which they have long campaigned to be introduced.
Encouraging greater charitable giving
Currently, businesses that donate goods to charity for sale, export or letting do not pay any VAT to HMRC and can recover any input VAT associated with these goods.
However, any other goods donated by a business to a charity for different purposes, including for the charity to give them away free of charge or use in the delivery of its services, are subject to VAT.
The consultation seeks to change that by introducing a VAT relief on these types of goods, which it says would encourage greater charitable giving and reduce waste by diverting saleable business goods from landfill.
It will consider whether the VAT relief should be limited to registered charities, or narrowed to those with poverty relief as an objective, “which would limit abuse by further targeting the relief”.
The consultation also suggests implementing a limit on the total value of VAT-free donations which individual recipients can receive.
However, it adds that “this would be challenging, and in some cases not possible, for charities to implement”.
“We’re keen to explore what is and isn’t possible in this space in order to design proportionate administration requirements for the relief,” it says.
‘An important reform’
Richard Sagar, head of policy at the CFG, said: “We’ve been calling for this consultation on (and introduction of) VAT relief on donated goods for some time.
“The previous government initially announced that it would consult on this, and we’re glad that the current government is now doing so.
“We also welcome the government’s commitment to incentivising charitable giving and reducing waste.
“As part of the Civil Society Group, CFG would like to see the introduction of VAT relief on business donations and goods for charities that balances the administrative burden on businesses and charities with minimising the opportunities for abuse.”
Richard Bray, chair of the Charity Tax Group, said: “We welcome the consultation. It’s a measure that we’ve campaigned for for some time and we’re pleased to see it reach the consultation phase.
“If implemented, this would be an important reform to help charities support vulnerable people living in the UK.”
The consultation closes on 21 July.
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