According to recent press reports, UK Athletics is in the media spotlight again, having received an unexpected bill of £500,000 from HMRC to recover VAT due on sports kit supplied to it free by one of its sponsors.
This highlights the complex judgment calls not-for-profit organisations must often make in order to get their VAT accounting right. It’s possible UK Athletics may have assumed that the kit was given to it as a donation, and therefore not subject to VAT, though HMRC has taken the view that it was received as payment in kind for services UK Athletics supplied to the sponsor in exchange.
While full details of this dispute have not yet been made public, charities often face the question of whether payments received from commercial backers are donations or consideration for a supply of services - even where those services may be perceived as an extended acknowledgement; for example, endorsement of the sponsor at the charity’s events.
UK Athletics’ situation was complicated by the fact that its services to the sponsor were paid for with goods rather than in cash. Easily overlooked, a barter transaction can still result in a taxable supply made by both sides. For example, the charity must account for VAT on its sponsorship services and the sponsor must account for VAT on the goods that were ‘paid for’ in the form of advertising.
It is very likely that this scenario was easily avoidable had it been duly considered before the parties entered the arrangement. A useful reminder that charities and not-for-profit organisations should always ensure their sponsorship contracts are reviewed with VAT in mind.