Your company is about to support a local charity. This will include donating the use of company equipment and employees’ time, as these resources will partly be used for non-business activity, will the related costs be tax deductible?
Usually, if your business incurs costs in connection with making a gift, it won’t be entitled to claim a tax deduction for them. However, there’s one exception to this otherwise hard and fast rule: businesses (companies and unincorporated businesses) are entitled to tax deductions for expenses they incur in making charitable gifts. But there are limitations and conditions.
The special rules for charitable gifts apply to:
If your company donates its trading stock to a charity, you don’t have to include anything in your sales income for the value of the gift. This means you obtain tax relief on the cost of the stock you’ve given away.
Employees’ wages and expenses
You can deduct any costs as normal business expenses if your company temporarily transfers one or more employee to work for a charity. If an employee volunteers for a charity in work time and if you continue to pay them and apply PAYE tax and NI to their salary. You can set the costs (including wages and business expenses) against your taxable profits as if they were still working for you.
As long as if it were used in your business it would qualify for capital allowances (HMRC’s version of a deduction for the cost of depreciation from profits). This includes office furniture, computers and printers, vans and cars, tools and machinery and so on. However, to qualify the equipment must have been used by your business.
Tax deductions are also allowed for cash donations to charities.
Despite these special rules, HMRC’s view is that the gift must also be must be ‘wholly and exclusively’ for the purposes of the business. It says it might not satisfy this condition if the charity has no local connection to the business, there is a personal connection with the donee and there is a lack of publicity surrounding the making of the donation.
In practice HMRC takes a fairly laid-back approach to the ‘wholly and exclusively’ rule and so allows tax relief unless the donations are unusually high or there is a clear personal connection between the company owners/directors and the charity.
As a rule of thumb, you must treat goods (including equipment) that you give away as if you had sold them at cost and therefore account for VAT at the appropriate rate. Gifts of money are outside the scope of VAT and so you do not need to account for VAT. For example, if the goods are normally standard-rated you must account for VAT on the gift at the standard rate. However, a special rule allows you to zero rate goods which a charity intends to sell, hire out or export.
Where you have to account for VAT on goods given away, even at the zero rate, you’re entitled to reclaim any VAT you paid on the cost the gift.
HMRC’s view is that the charity must have relevance to your business, e.g. be local. However, apart from this requirement special rules mean that businesses can claim a tax deduction for charitable gifts of money or the cost of donating goods, equipment or services, including your employees’ time.