Many charities sell goods donated by supporters via a network of charity shops. A number of charities are increasingly relying on platforms such as eBay to sell donated goods. Where certain conditions are satisfied, the sale of donated goods is zero-rated for VAT purposes. This can be beneficial because no output VAT is due on the income generated by these sales; however, VAT incurred which directly relates to those zero-rated supplies is recoverable in full. In addition, a proportion of VAT incurred on overhead expenses can be reclaimed.
1. What supplies does VAT zero-rating cover?
VAT zero-rating applies to the sale of any goods donated to a charity or a taxable person who is a ‘profits-to-charity’ person (i.e. wholly owned trading subsidiary) in respect of the goods. The zero-rating also extends to the letting or hire of any donated goods.
2. What are ‘goods’?
In this context, the definition of ‘goods’ is the normal sense of the word. It does not include services, for example. If a charity were to receive donated land or buildings which it then sold this would not be zero-rated under this heading of VAT law.
3. When will zero-rating apply?
Zero-rating applies where the goods have been made available for purchase (or hire) usually in a shop, charity auction or online to the general public or two or more disabled people or to those entitled and in receipt of means tested benefits. This second test applies when charities restrict the sale of donated goods to certain sections of the community and is probably most common with charities selling second-hand furniture.
4. When does zero-rating not apply?
If any sale or letting of donated goods arises as a result of any arrangements entered into by the donor or charity, and before the goods were made available to the public, the supply is not zero-rated.
5. What about poor quality goods charities cannot sell?
On occasion, well-meaning supporters may donate goods to a charity which are of poor quality and not suitable to be made available to the general public. This may include second-hand electrical goods, toys and clothing. Many charities will have arrangements in these circumstances to sell, say clothing, to rag merchants. Extra Statutory Concession (ESC) 3.21 allows these sales to also qualify for zero-rating.
6. Why is this relief important?
The zero-rating of the sale of donated goods by a charity is important for two reasons:
- Zero-rated sales must be monitored because these supplies contribute towards the compulsory VAT registration threshold and may trigger a VAT registration requirement.
- VAT incurred which directly relates to zero-rated supplies is recoverable in full. This means that if a charity incurs VAT on fit out costs of a shop, VAT on rent paid to landlords or even cleaning or repairs these costs are recoverable in full if a charity chooses (or is legally required) to VAT register or is already VAT registered.
Charities making zero-rated supplies below the compulsory VAT registration threshold are entitled to VAT register on a voluntary basis. A VAT registration may be beneficial in order to recover VAT incurred; however, this needs to be balanced against the administrative requirements of maintaining a VAT registration. A voluntary VAT registration may be backdated up to four years with HMRC’s agreement.
CVC advises many charities which make zero-rated sales of donated goods. We have recently carried out some work for a new client which operates a network charity shops. The charity should have VAT registered fifteen years ago (the value of zero-rated supplies exceeded the compulsory VAT registration threshold in 2003) and we were able to agree a significant retrospective refund of input VAT on the charity’s behalf with HMRC.
If you would like to discuss the contents of this blog or any other VAT matters please do not hesitate to contact Stewart Henry, Laura Beckett, Sophie Cox or your usual contact at CVC.