The key challenge for corporate sponsorship is to distinguish “sponsorship” (where the person or organisation making the payment receives a significant benefit such as having their logo displayed at an event, or being allowed free or preferential rate access to an event) from a “donation” (where the payment is freely given and the donor receives nothing in return but may receive a simple acknowledgement such as the donor’s name being included in a list of supporters in a programme).
If a charity receives corporate sponsorship as above, VAT will be due unless the sponsorship is part of a fundraising event. Charities should therefore ensure that any agreement allows VAT to be charged in addition to the agreed payment.
Where the sponsor is able to recover the VAT charged, that should not result in a cost to the sponsor and should be beneficial to the charity because it increases the value of its taxable activities. However, if a sponsor has a restricted ability to recover VAT – for example a bank or insurance company – a VAT cost will arise.
If the payment is a true “donation”, it will be outside the scope of VAT.
If a donation is given in addition to the sponsorship payment this may be excluded from the taxable amount, provided that it is clear from any agreement that the donation is entirely separate from the payment for sponsor’s rights.