Organisations across the UK have stepped forward to join the effort to equip the nation to tackle coronavirus, and many of our clients have been helping by offering free goods and services to agencies providing care and support.
Whilst it is fantastic to see such support, it can unfortunately be very be easy for firms to overlook the VAT consequences of supplying free goods or services.
As a general rule, if an organisation gives away goods on which it is entitled to recover input VAT incurred, then a deemed output VAT charge must normally be accounted for based on their cost value. On the face of it this looks very unfair, but the rules are there to ensure there’s no tax benefit of taking goods out of a business. There is some recent good news here as well; HMRC’s recent announcement (that PPE will be subject to the zero-rate of VAT between 1 May and 31 July 2020) extending the zero-rate beyond imported equipment (find out more here) means that some commonly donated equipment given away for free will not attract a VAT charge.
A common exception to this rule for goods is where a donation is made to a charity. Here, the donation can be zero-rated, meaning that there is no VAT to be paid to HMRC by the donor or VAT cost to the donee. However, the catch is that for this relief to apply, the charity must itself make an onward sale or hire of the donated items.
For example, a business manufactures hand sanitiser that it donates directly to the NHS Trusts, which are not charities. The business would be either unable to recover the VAT it has incurred on making the goods, or, if the VAT had already been recovered, obliged to declare output VAT on the donation. In this instance, it may be possible to utilise an NHS Trust’s associated charity.
However, in other cases, it may not be feasible to arrange a donation in a such a way as to gain benefit from the relief. The direct tax implications should always be considered when deciding the best approach.
A different scenario arises when an organisation supplies services free of charge. Here, no VAT is due on the value of the service donated to an unconnected party but HMRC may determine that the donor is engaged in a 'non-business' activity and expect it to calculate a restriction to the amount of input VAT that it recovers.
Promisingly, HMRC appears to recognise both the sense of urgency and the need for flexibility in these difficult times. We have seen them take steps to address potentially unfair tax consequences of coronavirus initiatives when these have been brought to its attention (for example, the new VAT relief covering fire authorities and NHS fighting coronavirus). We hope that it also may respond to similar representations made in respect of free supplies.
Meanwhile, if your organisation is contributing to the ongoing national effort by donating goods or services, and are concerned about the possible VAT implications, check first.