How does HMRC tax a UK company’s charitable donations?

There are a lot of fantastic and worthwhile charities out there that need help. As the owner of a UK limited company, you might find yourself in a great position to offer that sort of help.

Donating to charity on behalf of your business can be incredibly rewarding. Not only can it help to support important causes or vulnerable communities that you’re passionate about, but donations may also improve your company’s reputation by demonstrating to customers that your business cares and takes pride in its surroundings.

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In some cases, charitable donations might even be tax-deductible. That’s why we’ve compiled this comprehensive guide to walk you through what qualifies as a charitable donation, how HMRC taxes those donations, and the records you’ve got to keep to make a claim.

What qualifies as a charitable donation?

Charitable donations come in a lot of shapes and sizes. When HMRC is looking at donations and how that may impact your limited company’s Corporation Tax, they accept the following donation types:

• Money
• Equipment or trading stock
• Land, property, or company shares
• Employees
• Sponsorship payments

If you give any of these items away to a charitable organisation, you’ll normally be able to claim tax relief by deducting the value of your donations from your total business profits before you pay tax.

But there are a few specific rules around each donation type. So to help you out, we’ll quickly break down each one for you.

What happens when I donate money to charity?

If your limited company donates money to a charity or a community amateur sports club (CASC), you can deduct the value of that donation from your company profits before paying Corporation Tax.

That means you don’t have to pay tax on capital gains, and you can deduct the value of a charitable gift (or its ‘market value”).

Donating to a CASC? You won’t need to pay tax on capital gains, but you can’t deduct the value of your gift from business profits before paying Corporation Tax.

Most payments are deductible. But you’re not allowed to deduct the following types of monetary donations from your taxes:

• Loans that you’re expecting the charity to repay
• Money given on the condition that the charity buys property from your company
• Money that represents a distribution of company profits (or ‘dividends’)

There are also rules around donating money if the charity gives you something back in return. For example, if you donate £10,000 to a charity and then the organisation gives you 20 tickets to its annual gala ball in return.

Here are the rules you need to remember:

• If you donate up to £100, you’re only allowed to accept a benefit worth up to 25% of the value of your donation
• If you donate £101 – £1,000, you’re only allowed to accept a benefit with a maximum value of £25
• If you donate anything over £1,001, you can only accept benefits worth 5% of the value of your donation (up to a maximum value of £2,500)

These rules apply to anybody in your company or connected with your company (including relatives).

What happens when I donate equipment and trading stock to charity?

Just like a cash donation, your limited company can expect to pay less Corporation Tax if it gives equipment or trading stock (items your company makes or sells) to a charity or CASC.

When you donate equipment or stock to charity, HMRC allows you to claim full capital allowances on the cost of that equipment. “Equipment” includes things like:

• Computers
• Printers
• Cars or vans
• Tools
• Machinery
• Office furniture

If your company donates trading stock, you don’t need to include that value in your sales income. That means you’ll get tax relief on the cost of whatever stock you’re donating to charity.

What happens when I donate land, property, or shares to charity?

If you donate land, property, or shares in another limited company to a charitable organisation, you might end up paying less Corporation Tax. But it’s important to note that you can’t claim gifts or sales of shares in your own company.

The UK Government also advises that you should contact the charity in question to make sure they can accept your gift before you try to donate or deduct the expense from your company profits.

Before claiming this type of donation on your Corporation Tax, there are a few things you’ll be expected to obtain and hold in your records. You must get:

• A description of the land or property you’ve donated
• A record of the date of the gift or sale (which is also known as the ‘disposal date’)
• A statement confirming the charity (and not your company) now owns the land or property

If you donate company shares, all you’ve got to do is fill in a stock transfer form that takes the shares out of your company’s name and transfers them into the charity’s name.

Need advice on transferring property or shares? Contact HMRC for guidance on what qualifies as a deduction and how to claim the expense on your Corporation Tax.

What happens if I ‘donate’ employees to charity (secondment)?

You can also deduct costs as business expenses if your company temporarily transfers an employee to work for a charity for a period of time. This practice is called secondment, and it enables you to utilise your staff to transfer new skills over to a charity.

You can also deduct costs from your annual accounts if you let an employee volunteer for a charity during normal working hours.

If you send an employee to work with a charity on secondment, your company has to keep paying the employee and running Pay As You Earn (PAYE) on their salary.

The good news is that you can subtract those wages and associated business expenses from your company’s taxable profits when filing your taxes.

You aren’t allowed to claim the costs of secondment or volunteering if you send employees to work with a CASC.

What are sponsorship payments?

You can also deduct expenses from your Corporation Tax if your donation to a charity and the associated benefit qualifies as a sponsorship payment.

A sponsorship payment is when you give a charity money, and the charity then:

• Publicly supports your company’s goods or services
• Gives you permission to use their logo
• Sells your goods or services at their event or premises
• Links from their website to your company website

Not sure if your payment qualifies as a sponsorship payment or a donation? Contact the charities helpline for guidance.

Do you need to account for VAT on charitable donations?

Is your company registered for VAT? That means you’ll need to account for VAT on all of your donations.

But you are still allowed to apply a 0% VAT rate to all charitable donations given to charity if those donations take the form of products your company has made that the charity can sell, hire out or export.

You’re then able to reclaim the VAT on the cost of the trading stock that you’ve donated.

Are charitable donation rules different if you’re a sole trader or a partnership?

If you own your own business but don’t have a limited company, your business can still donate to charity. But there are slightly different rules on how you deduct those expenses when filing your Self Assessment return to HMRC.

All donations a self-employed individual makes to a charity or CASC are tax-free. You’re able to donate through a number of outlets including Gift Aid, straight from your wages or in your will. If you donate to a CASC, you can’t donate directly from your wages via Payroll Giving.

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You’ll need to keep records of all your donations if you want to deduct the value from your total taxable income. This is done when completing your Self Assessment tax return.

It’s also important to note the rate of tax relief you’ll get for donations varies depending on your tax rate. If you live in England and Wales, you’ll get:

• 80p worth of relief per £1 donated as a basic rate taxpayer
• 60p worth of relief per £1 donated as a higher rate taxpayer
• 55p worth of relief per £1 donated as an additional rate taxpayer

These rates are slightly higher if you live in Scotland. In Scotland, you’ll get:

• 81p worth of relief per £1 donated as a starter rate taxpayer
• 80p worth of relief per £1 donated as a basic rate taxpayer
• 79p worth of relief per £1 donated as an intermediate rate taxpayer
• 58p worth of relief per £1 donated as a higher rate taxpayer
• 55p worth of relief per £1 donated as an advanced rate taxpayer
• 52p worth of relief per £1 donated as a top rate taxpayer

Just like limited company donations, you’ll be expected to keep records of all the charitable donations you make as a sole trader or partnership member.

Want to learn more?

And that’s just about it. We’ve covered what qualifies as a charitable donation, the records you’ve got to keep, and how HMRC does or doesn’t tax those donations. But if you’ve got more questions, you should get in touch with HMRC for official guidance.

When it comes to taxes, you don’t want to get things wrong. So when in doubt, don’t hesitate to reach out to HMRC or a professional accountant.

Want to learn more about setting up a limited company? Check out our blog for guides on how to form a limited company, fund your business, manage your company remotely, and more.