VAT – Sponsorship of charitable activities

A registered charity had drafted a proposal under which a major UK corporate would provide the funds to enable it to give grants to 500 individuals to create and develop social and community enterprises.  The sponsor’s employees would be given the opportunity to mentor the participants, and there would be branding and marketing opportunities.

In many cases an agreement between donor and donee is there to provide comfort to the donor that the money will be spent in a particular way however where there is a contract this would normally indicate a supply and thus a liability for VAT.

It can be difficult in practice to distinguish between a donation with conditions attached and a contract.  HMRC argue that any arrangements from which a sponsor receives benefits in return for the money it gives involve the provision of a service to the sponsor for consideration.  The result is that the amount paid is not a tax-free donation.  This approach is reflected in VAT Notice 701/41 Sponsorship.

In this case, the draft proposal read too much like an agreement between the sponsor and the charity governing the way the payments by the sponsor were to be spent and giving the sponsor benefits in return.  As a result the sponsorship payments would be subject to VAT.

It did not prove practical to rework the proposal to remove the VAT risk because of the necessity to convince the sponsor that it would benefit substantially from its association with the programme.  In essence, the proposal would have needed to be changed from an arrangement under which the sponsor received benefits in exchange for its payment to a simple donation to the charity to be used for its purposes, possibly with the sponsor’s name being used for the programme, and no more.

At the time of publication this case study was technically accurate however, as tax law and practice change rapidly, you should take specific advice before taking any action.