There’s a lot to be said for making a charitable donation or sponsoring a local event or individual through your limited company. But how are such outgoings treated for tax purposes?
Naturally, a donation or sponsorship can provide help and support for the organisation or person in question.
Your company may also benefit from associating itself with a worthwhile cause (even if this is simply an accidental by-product!)
However, before you arrange a bank transfer or sign any cheques, make sure you understand how to account for this expenditure so that you get all the tax relief you’re entitled to while at the same time complying with HMRC rules.
Benefits of making a personal donation
Before considering donating to a charity through your limited company, if appropriate to the cause and the sums involved aren’t too large, you may want to look at simply making a personal donation instead.
You could donate as an individual and claim some tax relief by using gift aid. This allows the charity to reclaim tax at the base rate, meaning your net donation becomes gross.
Just remember to make sure you’ve paid enough tax to cover any sum the charity claims back from HMRC, otherwise, you won’t be able to use gift aid.
Donating via your company
There are several ways you can donate through your limited company. These include:
- Money, typically in the form of a cheque (some companies choose to use a giant cheque and pose for a photograph with the charity to be sent to local media outlets for PR purposes) or by way of bank transfer.
- Trading stock or equipment that your company produces or that you buy to donate to the charitable organisation.
- By making a gift of land, property or shares in another company.
- Through sponsorship (see below) of a single event or for a season via regular payments.
How to account for donations
If you donate money to a community group or charity you can deduct the value of the donation from your company’s pre-tax profits for the year and pay less corporation tax.
However, you can only claim for tax relief if your donation has none of the following conditions attached:
- The donation is in effect a loan that the charity will have to repay to your company.
- The cash donation is in return for a pledge from the charity or community organisation to purchase property from your company or from anyone associated with the company.
- The donation is in the form of a dividend or distribution of company profits.
In addition, any benefit the company receives in return for the money donated has to be below a certain amount.
For donations up to £100, the maximum value of the benefit should not exceed 25% of the donation; for donations of £1,000 and more, the value of any benefit received should not be more than 5%.
Donations of trading stock or equipment
If you decide to donate trading stock (items you make or sell) to a group or charity, you can claim tax relief on the cost of the stock.
As a limited company, you should account for VAT for any trading stock you donate although not if the donation is made so that the charity can sell, rent out or export the items.
In this case, you can claim back VAT on the cost of the items.
If you opt to buy sporting equipment and then donate it to the club or charity, your company can claim corporation tax relief.
This also includes charitable donations of computers, printers, copiers, office furniture, tools, machinery, cars and vans.
As the company usually gets something in return for their financial support through sponsorship, such donations are treated as business expenses and are deducted from pre-tax profits.
To qualify as a business expense, there should be a demonstrable benefit to your company from the sponsorship.
This can include the use of the charity’s logo on your company’s branding or printed material and/or the charity publicly endorsing or supporting your goods or services.
HMRC applies strict conditions on sponsorship and on what qualifies as a legitimate business expense. See here for more information.
Before you make a large donation to a charity or sponsor a local organisation, we recommend you speak to your accountant first so you can take full advantage of any tax relief.
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