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Covid-19: stock donations

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In response to the Covid-19 pandemic many businesses are donating items of trading stock to charities, the NHS and other businesses employing key workers including medical supplies such as hand sanitiser and personal protective equipment (PPE). When considering such donations, businesses should be aware that when trading stock is disposed of other than in the course of a trade, the general rule is that the market value of the stock must be taken into account as income when calculating the profits of the trade for corporation tax purposes and there is a deemed supply for VAT purposes such that VAT is due on the cost of the goods. This is regardless of the amount of income actually received. However, there are some specific tax reliefs available which over-ride this which are outlined in our article.

Corporation tax reliefs

For corporation tax there are two exemptions which are usually relied upon for claiming a tax deduction for gifts or donations.

  • Relief for gifts to charities: This applies where a company carrying on a trade freely donates an article to a ‘recognised’ charity which is one typically manufactured or sold by the company in the course of that trade. It is important to note that the donation must still meet the usual ‘wholly and exclusively’ test in order to qualify for a tax deduction. Furthermore, whilst the above applies specifically to recognised charities, NHS institutions such as Foundation Trusts, whilst not-for-profit, are not themselves charities for these purposes; and
  • Relief for gifts of medical supplies: This applies where a company makes a gift from trading stock of medical supplies or medical equipment for human use and for ‘humanitarian purposes’. HMRC guidance states that cases falling within the World Health Organisation (WHO) guidelines on medicine donations should meet this criteria.

Where either of the above exemptions apply, no amount is required to be brought into account as a receipt in consequence of the donation, and in computing the profits of the trade, a deduction is allowed for cost of the stock. In the case of medical supplies, a deduction is also specifically permitted for any costs of transportation, delivery or distribution incurred by the company in making the gift.

It should be noted that special rules apply where the donor, or a connected person, receives a benefit in connection with the gift of trading stock, which in effect, disallow a tax deduction from being claimed. Similarly, the legislation is currently unclear as to the availability of a tax deduction where the article being donated is not manufactured as part of the business’s ongoing trade – further clarification is being sought on this matter from HMRC.

As such, whether a gift or donation meets the required criteria will be dependent on the facts and circumstances in each case.

VAT tax reliefs

The following reliefs exist:

  • Goods withdrawn from sale: Where goods have been withdrawn from sale because they have reached the end of their economic life (for example the use-by date has been reached or the goods are damaged) and the choice is to donate or destroy them, they can be regarded as no longer an asset of the business and the disposal is not to be treated as a supply for consideration.
  • De minimis: Where the cost of goods given to a person in a 12 month period is less than £50 no VAT is due but the input tax incurred on the goods by the VAT registered donor remains deductible. The EMI case in the CJEU has confirmed that where goods are given to individuals who all have the same employer the £50 threshold applies to the gifts to each individual and not to the employer as a whole. We understand from our discussions with HMRC that they do not intend to increase or waive the limit in response to Covid-19.
  • Zero rating of certain goods: There are also some specific zero rate provisions for any goods donated for resale, letting on hire or export by charities or their trading subsidiaries.
  • Temporary zero rating of PPE: A temporary zero rate applies to supplies of PPE as defined by Public Health England’s coronavirus (Covid-19) PPE guidance on 24 April 2020. The measure has effect from 1 May to 31 July 2020. Unfortunately, the approved list of PPE does not currently cover many of the more generic items such as hand sanitisers, non-fluid resistant gowns and scrubs. We have suggested to HMRC that they consider broadening the list so as not to discourage benevolent donations of these items.

For donations made between 1 March 2020 and 30 April 2020, the government has confirmed it will donate the VAT on donated supplies of PPE to charity. Businesses will have until the end of June to tell HMRC what VAT they have paid, giving them time to complete their usual accounts and identify these costs. Affected businesses should contact for further information. 

Sandra Cox, KPMG