Business News
Gifts to charity of company equipment, trading stock or staff help
Your business will be eligible for tax relief if it makes a gift of equipment or trading stock to a charity or a Community Amateur Sports Club (CASC).
You’ll be able to reduce the taxable profits your business makes by the cost of the gift so you end up paying less tax. This applies whether you’re a sole trader, a partnership or a company.
You can also get tax relief for the costs of temporarily transferring an employee to work for a charity on ‘secondment’.
Gifts of Equipment
If you’re a sole trader, a partnership or a company, you can benefit from full capital allowances on the cost equipment, plant or machinery that you donate to a charity or CASC. The equipment must have been used in your normal business activities to qualify though, e.g. used or replaced items.
What are Capital Allowances?
When you buy an asset, such as equipment, to use in your business, you can reduce your taxable profits by claiming capital allowances on this asset.
Capital allowances allow you to deduct the cost of the assets you buy from your taxable income, meaning you pay less tax.
You calculate your capital allowances by taking the percentage of the cost that’s left after you have claimed allowances for earlier years. However, your total capital allowances can’t be more than the asset cost you.
If you sell an asset for more than it cost, you’ll have to pay tax on a ‘balancing charge'.
This is to ensure you can’t get capital allowances on more than the asset cost you in the first place.
Example
A company has no assets to claim capital allowances against.
However, in May 2005, it buys a computer for £5,000 (nice computer!)
In the first year, it can set 40% of the cost, £2,000, against its taxable profits, leaving £3,000 of the cost to carry over to the next year.
In the second year, the business can claim 25% of the remaining £3,000 cost, £750, against its taxable profits, leaving £2,250 to carry forward.
In the third year, the business sells the computer for £2,500. As this is more than the remaining balance of the cost, the business will have to pay tax on a ‘balancing charge’ of £250 that’s been added to its overall profits.
Capital Allowances on Gifts to Charity
So, if the business gave away the computer in the above example, it has to treat the gift as a sale at its market value of £2,500. Therefore, it still has to pay tax on the balancing charge.
However, if the business gives the computer to a charity or CASC, it can treat the gift as having no value. Therefore, instead of paying tax on the balancing charge, it can set the unused cost of the computer, £2,500, against its taxable profits so the whole cost has been covered.
There’s a new system of capital allowances for assets bought from April 2008 onwards. Businesses can claim an Annual Investment Allowance of up to £50,000 a year.
The special rules for giving equipment to charities continue to apply, so the gift is treated as having nil value.
The business can continue to claim capital allowances for the full cost.
Gifts of Trading Stock
If you donate goods that your business makes or sells, your trading stock, to a charity or CASC, you can claim the cost of these goods.
This applies to all types of traders and you don’t have to include anything in your sales income for the value of the gift, so you therefore reduce your company’s taxable profits by the full cost of the goods.
However, it is different if your business is giving away trading stock to someone who is not a charity or CASC. If you do this, then you have to include it in your sales income for the full market value of the gift.
This is referred to as a ‘notional’ trading receipt and although you reduce your taxable profits, you have to pay tax on the notional sales income.
Secondment of Employees
If you lend an employee to a charity, but not a CASC, you’ll be able to treat the cost as a business expense in your accounts.
If your business carries on paying that employee throughout the secondment, you’ll also be able to set the cost against your taxable profits as if they were still working for you as normal.
Volunteering
The same rules apply if any of your staff volunteer during work time.
You can continue to claim tax relief for the cost of employing them and these costs can still be treated as a business expense when calculating chargeable profits.
VAT
If you buy goods specifically to donate them to charity, it is not considered as a business activity for VAT purposes.
Therefore, you do not need to account for VAT on items you bought to give away.
However, you cannot reclaim the VAT you paid when you bought the goods, because you can only reclaim VAT on things that you buy specifically for a business purpose.
VAT and Donations of Trading Stock
If you donate goods that you make or sell in your business to charity, e.g. trading stock, this accounts as a taxable business supply for VAT purposes.
If you’re VAT registered, you will need to account for VAT on goods that you give away at the appropriate rate, either the standard 17.5% or the reduced rate of %5.
However, you can zero rate your supply if your company is specifically making the donation to enable the charity to:
• Sell the goods
• Hire the goods
• Export the goods
This is typically the case when goods are given to a charity to auction or sent overseas.
This means if you are VAT registered, your company can reclaim the VAT on the purchase of the trading stock that you donate.
