In January 2019, HMRC published an updated Sponsorship VAT Notice (701/41) to improve and clarify the guidance. This was welcome news as the Notice had not been reviewed in full since its original publication in 2002 and incorporated a lot of feedback submitted by the Charity Tax Group (CTG).
CTG had encouraged HMRC to include substantive additions to section 2.3 Mixed sponsorship and donation in respect of issues relating to use of a charity’s name and charity of the year.
Following further discussions with HMRC officials, a new section has been added to the Charity VAT Notice (701/1), although we did not have a chance to comment on the final text before publication. While the new guidance does not follow the exact wording proposed by CTG, it is good that this issue is now being addressed. CTG will now be consulting its charity and Observer Members to test how well the guidance meets their needs in practice.
5.9.6 Mixed sponsorship and donations
Charities will often receive both sponsorship and donations at the same time. Provided the donation is entirely separate from your sponsorship agreement, or your sponsorship agreement document makes clear which part is payment for services, and which is a donation, you are not required to account for VAT on that donation. However, it must be clear that any benefits your sponsor receives are not conditional on the making of the donation or gift.
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.
For example, where a retailer allows customers to vote on which charities will receive donations. While this activity might result in increased sales for the retailer, 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.
It is often regarded as good practice for charities to enter into two agreements with corporate sponsors when entering into ‘charity of the year’ or similar arrangements. The first is between the charity’s subsidiary and the sponsor over the granting of publicity rights. The second is between the main charity and the sponsor to receive the donation. In this 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. This also applies to any guarantee arrangement whereby the business agrees to make up any shortfall in the fundraising target for the campaign.