The UK government is proposing to make in-kind giving by companies easier, but still the tax system is complicated, confusing and a considerable disincentive to greater involvement. So what should be done?
In July 1997, the UK government launched a review of charity taxation, a part of the prime minister’s much vaunted ‘giving age’. The stated aim is “to create an environment in which charities can succeed”, including “a tax system that is as fair, simple and transparent as possible… and one which offers real incentives to individuals and businesses to give”.
In March, that review produced a consultation document on possible changes, generally greeted by the voluntary sector as disappointing and lacking in radical ideas. For companies, (with one exception) it contained only modest simplifications to the workings of Gift Aid and payroll giving, including the welcome idea of a 10% ‘matching grant’ from public funds to kick-start a take-up campaign.
The exception was a promise to legislate in the current Finance Bill extending Corporation Tax relief on in-kind contributions of equipment or stock. At present only gifts to educational establishments receive automatic relief, but now all charities are to be covered.
However this provision fails to address the real disincentive to in-kind giving, which is not Corporation Tax (where ways round the rules already exist – see below), but Value Added Tax. As discussed in Community Affairs Briefing December 1998, free gifts of value can give rise to a 17.5% VAT bill, again unless complicated procedures are followed.
So what ought to be done to achieve the government’s stated aims? To answer that question, it is first necessary to have a basic understanding of the current UK tax rules, both tax on income (Corporation Tax) and tax on transactions of added value (VAT).
Corporation Tax – cash
In calculating the amount to be taxed, companies can deduct expenses incurred “wholly and necessarily” for business purposes, things like staff wages and raw material purchases. Costs which are not business expenses – like donations to charities – are disallowed. Instead relief must be sought, for example under the Gift Aid rules.
So (generally speaking) companies can get tax relief for their community contributions in cash, either as a donation or as a business payment (for example corporate publicity). So sometimes an artificial split is needed. But this flies in the face of the whole thrust of CCI in the last two decades, which has argued for enlightened self-interest, that getting involved is both good for business and good for community, not either/or.
Furthermore the procedures for claiming Gift Aid relief are cumbersome: the company sends a net payment to the charity along with a special form, then pays the tax quarterly to the Inlands Revenue; each charity has to reclaim the tax back from the Revenue (often at a different tax rate).
Corporation Tax – non-cash
In-kind charitable contributions are more problematic, as the wages of a secondee to a charity are not an allowable business expense per se. In the 1980s, various specific reliefs were brought in, allowing employment expenses of temporary secondments to charities, enterprise agencies and educational establishments. (Embarrassingly, the latter was set to expire after 10 years (1997), but no one noticed, so this year’s Finance Bill will reinstate the relief and retrospectively legalise the last two years.)
In-kind gifts of stock or equipment to educational establishments have been allowable since 1991 and, as noted above, this is now being extended to all charities. Until now, companies could in effect get round the problem by donating sufficient funds to a charity, for example through Gift Aid, so the charity could then purchase the goods – a nonsensical paper-chase.
Value Added Tax – cash
VAT is not a sales tax as such but rather taxes the value added by each stage of a commercial process, levied at the point of transfer. The main current UK rate is 17.5%, with some goods and services exempt or zero rated. The detailed rules are notoriously complex.
For cash donations there are normally no VAT implications, essentially because there is meant to be no transfer of value – the business receives little benefit as it is a gift, not a payment for services rendered. In contrast, a payment which yields benefits, such as significant publicity, should normally have VAT added by large charities. Where the charity is small and the annual total of such supplies of service is below the VAT registration threshold, no tax is due.
Even though the company has paid an extra 17.5%, in practice this is not normally a problem where the company is registered for VAT; it reclaims the amount back against tax collected on its own supplies of value. So, just as with Corporation Tax, for most companies cash payments to community causes are tax effective (small unregistered companies or those partially exempt such as financial services may suffer a real cost). But the procedures force an ‘either/or’ approach again, contradicting the win-win motivation for CCI, articulated by government itself.
Value Added Tax – non-cash
Gifts of services, such as secondee time, are not normally a taxable supply for VAT purposes. The main problem with VAT surrounds in-kind giving, as the gift of a business asset normally constitutes a taxable supply – no cash has changed hands but where the goods or equipment have a value, a transfer worth taxing has occurred. A large company donating 1,000 old computers, each worth (say) a nominal £50, would face a VAT bill of £8,750.
Thankfully, by specific exemption, goods donated to a charity for resale can be zero rated. So an organised in-kind giving programme can use an intermediary charity (like an in-house foundation or Gifts In Kind UK), provided the goods are then sold on, albeit for a notional ?1. Again, at the price of following a paper-chase, tax problems can normally be avoided. But the rules severely penalise and disincentivise ad hoc and unstructured giving.
Reforming the system
It is clear these rules are at best cumbersome and at worse act as a disincentive to corporate giving. They certainly do not achieve the government’s stated aim of creating a tax system which provides real incentives to give. So what should be done?
The blindingly obvious solution is to make community contributions automatically allowable as a business expense for income tax purposes. This is the case is the USA and many continental European countries. All CCI would then become a legitimate business activity, as virtually everybody from charities, companies, BITC and the government itself argues.
By dispensing with the need to claim a relief, as under Gift Aid, it would grant tax relief to the donor, not the donee. The government’s tax review consultation paper expresses doubt that this would incentivise giving by individuals, but promises further research. Companies are not generally incentivised by tax relief, but are put off by bureaucracy.
If such root and branch reform proves too radical, the priorities for change within the existing framework are as follows:
1. In-kind gifts of value to charities should be automatically zero-rated for VAT. No significant loss of revenue should result, as companies at present either use the complex procedures, or give assets away without telling Customs & Excise, or just throw them away.
2. Existing rules must be clarified and consistently applied. For example, just how much benefit can be derived from a donation? Inland Revenue and Customs & Excise have conflicting views and even within each, different tax offices give varying guidance, for example on use of corporate logos to acknowledge donations.
3. Current practices which have run ahead of existing rules need to be legitimised. Examples may include time off and expenses for ad hoc volunteering (the secondment exemption talks only of expenses attributable to employment to charities). Companies no longer relate just to registered or recognised charities, but a plethora of informal community groups and partnership initiatives.
4. New forms of giving need to be included, such as reduced or free of interest loans. These are being promoted by agencies such as BITC and CAF. This cost is not eligible for tax relief. Capital gifts also are not allowed profits tax relief (other than equipment used in the course of the business, as noted above), so hindering effective use of assets such as land or shares.
5. UK tax rules inhibit a global view. British business is increasingly international, but donations to overseas causes are not allowable, unless routed through a UK registered charity like Oxfam or Save the Children. The government’s new Millennium Gift Aid recognises this by allowing donations (cash and in-kind) to medical and educational charities in the 80 poorest countries. What about other causes and countries? What happens after 2000 when the scheme ends?
Finally, the government has itself raised the question of incentives, but few companies will want to ask for what amounts to a subsidy for getting involved. All they ask is that tax disincentives be removed and the bureaucratic rules simplified. Is that really too much to expect from business-friendly New Labour?
Professional guidance should always be sought on the correct treatment of charitable donations.
Corporate Citizenship Briefing, issue no: 45 – April, 1999
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