The tax treatment of donations and gifts of stock including medical supplies depends largely on the nature and value of the trading stock.
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:
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
For VAT the following reliefs exist:
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 firstname.lastname@example.org for further information.
Please get in touch with the KPMG Charity Tax Team if your business has made or is considering making gifts or donations of trading stock and you would like to discuss this further.
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