Some charities or their trading subsidiaries sell goods that have been donated to them. Subject to certain conditions, sales of donated goods can be zero-rated. The benefit of the zero rating is that the charity or its trading subsidiary does not need to account for VAT on the sale but can recover the VAT incurred on costs directly attributable to making that sale. This is valuable both in terms of recovery of VAT on direct expenses and in improving the overall VAT recovery position of the charity.

The sale of donated goods by a charity or a trading subsidiary can be zero-rated subject to the following conditions:

• the goods have been donated to the charity or its trading subsidiary with the intention that they will be sold or hired
• the goods must be sold or hired in the condition that they are received – they may be cleaned or repaired but the structure of the goods cannot be altered
• the sale or hire takes place as a result of the goods having been made available for purchase or hire (whether in a shop, at a charity auction or elsewhere) to the general public, to two or more disabled people or to people receiving means-tested benefits
• the charity has not used the goods for any other purpose apart from being available for sale or hire by the charity – which means that if the charity uses the goods itself (for example, furniture in its offices) and then decides subsequently to sell them, the sale would not be covered by the zero rating of donated goods
• the sale does not take place as a result of any arrangements relating to the goods entered into by the parties to the sale before the goods were made available to the general public.

There is an extra-statutory concession whereby donated goods, which would normally be sold to the public, are zero-rated when sold to rag/scrap merchants, when the goods are unsuitable for sale to the general public due to the poor quality.

The law also allows for zero rating of goods donated by businesses to charities for sale, hire or export. Ordinarily, a business donor would have to account for VAT on such goods. Goods donated for the charity’s own use do not qualify.

Where a trading subsidiary of the charity runs a shop, it may zero rate sales or hire of donated goods if the entity is registered for VAT and declares in writing that all of the profits from these sales or lettings will be transferred to a charity or are otherwise payable to a charity. An entity under these arrangements is a ‘profits-to-charity person’. However, the sale of trading goods bought by the charity is not covered by zero rating and the VAT liability of such items will therefore follow the normal VAT rules.

There may be an impact for business rates treatment where a charity shop is operated through a trading subsidiary.

Donated auction items can be zero-rated subject to the rules as set out above (i.e. it does not cover donated services such as holidays).

For further information see HMRC VAT Manual VCHAR7200 – Charity shops and sales of goods: Sale of donated goods.

Charities should also consider the Gift Aid rules on donated goods.