If you donate time and resources from your business for the benefit of charity, are you entitled to a tax break?
Good works
Businesses often get involved in helping charities. This is good for the charity and can generate kudos for the business, which is an important factor for tax reasons, as we’ll see later. With this in mind, our subscriber, who owns a building firm, provided two employees and various materials to help rejuvenate his local village hall, which operates as a registered charity. Because the job generated no income for his company he was worried that it wouldn’t be entitled to tax relief for the related expenses.
Special rules for certain expenses
Generally, expenses which aren’t incurred for business purposes aren’t tax deductible. The good news for our subscriber is that special rules allow businesses (companies and unincorporated businesses) to claim deductions for certain costs incurred when working unpaid for charities or in other situations:
- stock (materials)
- employees wages and expenses; and
- the gift of equipment etc., as long as if it were used in the business making the gift, it would qualify for capital allowances.
Trap. Companies can’t claim a deduction for donations to charity for an accounting period in which they make a loss.
Business owner’s expenses
As a director of his company our subscriber counts as an employee for tax purposes and therefore the special rules mentioned above also apply to his salary and expenses when he was personally involved in the work for the charity. However, had his business been unincorporated, i.e. run by a sole trader or a partnership (including a limited liability partnership), the position would have been less clear. Sole traders and business partners aren’t employees of their business and so the special rules don’t apply to costs they incur when working for a charity, e.g. travel expenses. This puts a question mark against tax deduction.
It’s a gift!
In our view, where a sole trader or partner doesn’t ask a charity to reimburse their costs, they are making a gift to the charity. This means another special rule can be used to permit tax deductions for the expenses as long as they are for a business purpose. Getting the business noticed is a business purpose, because in essence it’s advertising. However, you might well come across a tax inspector who argues otherwise. Therefore, we suggested an alternative approach.
Tip. To avoid doubt over the deductibility of a sole trader’s or partner’s expenses, ask the charity to reimburse these costs, but tell it that you’ll donate them back through the gift aid scheme. HMRC’s view of this arrangement is that the expense and the reimbursement cancel each other out and so are tax neutral for the business, and the gift aid payment qualifies for tax relief as usual. There’s an added bonus for the charity. For example, if a charity reimburses £200 and you gift aid it back, HMRC will give the charity another £40.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.