No one like paying more tax than necessary. So how should companies take advantage of the concessions the government offers?
Companies are increasingly urged to support the community on grounds of business good sense rather than charitable objectives. Unfortunately the fact that the dividing line between business and charity is blurred has yet to get through to the tax authorities. So companies have to channel their support through a minefield of regulations designed for a by-gone era. This Best Practice note is merely intended as an introduction to the issues and expert advice or the assistance of a specialist agency such as the Charities Aid Foundation should be sought.
When a payment is not made “wholly and necessarily” for business purposes, it will be disallowed for a company’s tax purposes unless charitable relief is sought. Generally relief for payments to charities is obtained through:
a one-off payment under Gift Aid – current minimum £400, no maximum total (or additionally, for most PLCs, a single payment – no minimum, but a restriction in the total donated in any one year), or
regular payments for at least four years under covenant.
Covenants were the traditional method, but now most companies use the single payment method. Under both, companies pay the gift net of tax, account for the tax to the Inland Revenue, and then the charity reclaims it.
To be charitable, the recipient need not be a registered charity, although this avoids any doubt. So, for example, schools and places of worship are charitable despite not being registered. Enterprise agencies are not in themselves charitable, but since 1982 they have enjoyed a concession which allows companies to claim tax relief on payments to them.
Deed of covenants are notoriously awkward in administrative terms. Single payments under Gift Aid are easier but there are still forms to fill in and tax to be reclaimed. The alternative is to make a single tax efficient payment to a charitable intermediary, either an in-house trust or a professional agency such as Charities Aid Foundation. That intermediary can then make many individual payments, gross of tax, strictly following the company’s instructions, without the need for any further paper-work. Some companies have funded their in-house charitable trust through an endowment of shares.
Since 1983, the cost incurred in seconding a member of staff to a charity has been given tax relief, provided the secondment is temporary. For gifts of stock or equipment, the rules are tighter. Provided the in-kind gifts are occasional and insubstantial, the cost to the company can simply be ‘lost in the system’ and hence given relief. Alternatively they can be formally written off in the books, before transfer. Where items have substantial value and are given regularly, this is not possible. So the easiest is to sell the item at cost and provide a tax-efficient donation to fund the purchase, even though in some cases VAT must be added. Those regularly gifting equipment, for example computer companies, should establish a charitable intermediary, as above. (by special concession, gifts to educational establishments all enjoy relief.)
Sponsorships, especially in the arts, often have both commercial and charitable objectives. These payments should be split, with the marketing element an allowable business expense (on which VAT may be payable), with the charitable element gifted in a normal tax-allowable way.
Companies are sometimes asked to take advertising space in a brochure or programme to support a “good cause”. Provided the cost is not out of all proportion to the benefit, this is normally an allowable business (not charitable) expense. It needs to come from marketing or other non-charitable budgets. VAT may again be payable. Given the easier single payment rules, the use of adverts is declining.
Many companies now assist their employees to donate to charities by running payroll giving schemes. Up to £600 pa can be donated out of gross income, without any need for direct accountability to the Inland Revenue. The employer must use an agency such as CAF to distribute the payments. Promoting the scheme, on which CAF can advise, is the key to increasing take-up.
This note has not considered the difficulties of making tax-efficient payments across national frontiers. Despite the general progress towards European unity, harmonisation of charitable giving is still a long way off.
The Charities Aid Foundation can be contacted through Wendy Walters, C A F, 114-118 Southampton Row, London WC1B 5AA. 071 831 7798
Corporate Citizenship Briefing, issue no: 7 – December, 1992