An ArtsProfessional feature in partnership with Twine

Do you regularly find your head pickled by the financial rules and regulations pertaining to fundraising? Accountant Pete O’Hara is on hand to steer you safely around the pitfalls.

Photo of an abacus

What’s the difference between sponsorship and a donation?

Donations are financial or other support in the form of cash or gifts that are freely given (although they can be requested or ‘solicited’) and secure nothing in return for the donor. You can, however, give donors modest (low value) tokens of appreciation – called ‘benefits’ – in order to acknowledge a gift but there are limits on their value:

Amount of donation

Maximum value of benefits

£0 - £100 25% of the donation
£101 - £1,000 £25
£1,000+ 5% of the donation
(up to a maximum of £2,500)

Common low value tokens of appreciation include:

  • giving a flag or sticker;
  • naming the donor in a list of supporters in a programme or on a notice;
  • naming a room or building etc after the donor; or putting the donor’s name on the back of a seat in a theatre/cinema.

If you exceed these limits and/or an individual donor – or person connected to the donor – benefits significantly from their donation, then it’s not really a donation.

Similarly, if you give a corporate donor benefits in return for a payment, this is likely to mean that it’s sponsorship rather than a donation.

Where you receive sponsorship (including sponsorship-in-kind), you are expected/obliged to provide the sponsor with a significant benefit, which might include any of the following:

  • naming an event after the sponsor;
  • displaying the sponsor’s company logo or trading name;
  • participating in the sponsor’s promotional or advertising activities;
  • allowing the sponsor to use your name or logo;
  • giving free or reduced price tickets;
  • allowing access to special events such as premieres or gala evenings;
  • providing entertainment or hospitality facilities;
  • giving the sponsor exclusive or priority booking rights.

There could be many other situations in which a sponsor may be receiving tangible benefits.
What matters is whether the agreement or understanding with a sponsor requires you to do something in return.

What is sponsorship-in-kind?

Sponsorship-in-kind arises where a company provides services or goods either free of charge or at a lower rate than they would normally charge commercially. So, if a printing firm agreed to undertake £1,000 of work free of charge, they have given you ‘sponsorship-in-kind’ of £1,000. However, in your accounts, you should show “sponsorship-in-kind income of £1,000” and “printing costs-in-kind expenditure of £1,000” (and therefore no net effect on your profit).

Can an individual or company that isn’t a charity accept donations?

Yes – there is nothing to stop a non-charity from asking for or receiving donations. Many sites like JustGiving and Kickstarter enable any type of organisation – or individual – to ask for donations towards their work.

Why does it matter whether something is a donation or sponsorship?

The definition of income can affect its treatment in respect of various taxes – whether that’s corporation tax, VAT, Gift Aid etc.

What are the VAT implications of receiving donations and/or sponsorship, if the recipient individual or organisation is registered for VAT?

  • Donations are generally not subject to VAT.
  • Earned income from fundraising events is subject to VAT
  • Sponsorship is subject to VAT
  • Sponsorship-in-kind is also VAT-able so recipients should in theory declare the output VAT element of any such income and reclaim the input VAT element of the related in-kind expenditure (though many people ignore this in practice as the net impact is nil).

What are the corporation tax implications of receiving donations and/or sponsorship?

Registered charities are not subject to corporation tax on their profits. For any other organisation (even if notionally ‘not for profit’), both donations and sponsorship will almost always count towards their taxable profits.

What is Gift Aid and how can I claim it?

Gift Aid is a tax relief from the Government which helps registered charities to earn more on their donations. It enables charities to reclaim tax from HM Revenue & Customs (HMRC) on the ‘gross’ equivalent of donations (ie their value before tax was deducted at the basic rate, which is currently 20%). This means that for every £1 donated, charities can claim an extra 25p.

You don’t have to register to claim Gift Aid but it can only be claimed by an organisation with charitable status that is recognised by HMRC as a charity for tax purposes, before HMRC will accept a Gift Aid claim. Recognition by HMRC as a charity is a separate process from registering with the Charity Commission as a charity. You must nominate someone in the charity to be an authorised official or nominee, so that they can claim/receive money on behalf of the charity.

What types of income qualify for Gift Aid?

Gift Aid can only be claimed on gifts of money from individuals, sole traders or partnerships, in any of the following forms:

  • cash;
  • cheque;
  • Direct Debit;
  • credit or debit card;
  • postal order;
  • standing order or telegraphic transfer.

Gifts made by cheque only count as received once the cheque has cleared. A charity can accept gifts of money made in sterling or any foreign currency. In addition, in certain circumstances some payments made to charities which are not strictly gifts – such as successful bids at a charity auction – may be treated as donations for Gift Aid purposes as long as the Gift Aid rules are followed.

Income that doesn’t qualify for Gift Aid includes:

  • donations of money from a company;
  • donations by waiving or writing off a loan: for example an individual may lend money to your charity and then, at a later date, agree that it does not have to be paid back – this is not a gift of money it is the waiver of a loan;
  • gifts made on behalf of other people: for example, a membership subscription paid on behalf of somebody else – this is a gift of membership from the payer to the member not a gift made to the charity;
  • gifts that come with a condition about repayment;
  • gifts with a condition that the charity buys goods or services from the donor;
  • payments received in return for goods or services: for example, payment for admission to a concert, payment for a raffle ticket, an entrance fee for an event;
  • a ‘minimum donation’ where there is no choice about payment – this is simply a fee for goods or services, it is not a gift;
  • gifts made using ‘charity vouchers’ or ‘charity cheques’;
  • donations received before the date that HMRC accepts an organisation as a charity for tax purposes.

What’s the situation in respect of Gift Aid around the various types of income from fundraising events?

Type of income

Is it eligble for Gift Aid?

Ticket price for event No
Ticket price plus compulsory specified minimum donation No
Ticket price plus suggested donation amount: Yes, but on donation element only
Donation only Yes, on whole amount
Sponsorship No
Raffle tickets No
Auctions – commercially available item Yes, but on amount over commercial price only
Auctions – items not commercially available No
Auctions – unique experiences, etc. No

Are there any additional implications for joint fundraising events?

Most fundraising guidance suggests that all fundraising events should ideally be held for only one charity at a time. This is not as a result of any legislation, but primarily for practical reasons, simplifying the publicity, and ensuring that donors know exactly where their money is going. If funds are to be split between two or more beneficiaries, there must be a written agreement between the organisations concerned to agree a percentage split and to agree the logistics of joint publicity. If the event is hosted by two organisations, only one of which is a charity, Gift Aid can only be claimed on the proportion of the donations that stays with the charity. The charity cannot claim Gift Aid on all the donations then pass a proportion onto the non-charity.

How can I ‘sell’ the benefits of making a donation to an individual? I’ve heard that making a donation can be ‘tax efficient’ – what does this mean?

Making a gift to a charity can’t magically save someone money overall, whether they’re an individual or a company – they are, after all, still giving money away.

However, there are ways of doing it that increase the positive impact upon the recipient charity. There are also some reliefs available to ensure that the donor’s tax calculation takes into account their generosity so that they pay less tax than they might have done if they hadn’t made the donation.

What are the tax implications for individual donors?

Donating through Gift Aid means charities can claim an extra 25p for every £1 a donor gives – this doesn’t cost the donor any extra. The donor needs to make a Gift Aid declaration for the charity to claim, usually by filling in a form (one for each charity they donate to). A Gift Aid declaration can cover all donations from the past four years.

Donations will qualify as long as they’re not more than four times what the donor has paid in Income and/or Capital Gains Tax in that tax year (6 April to 5 April).

If the donor pays tax at a rate of 40% or above, they can claim back the difference between the higher and basic rate on their donation, either through their self-assessment tax return or by asking HMRC to amend their tax code.

So, for example, a higher-rate taxpayer donates £100 to charity and claims Gift Aid to increase the value of the donation to £125. As they pay 40% tax, they can also personally claim back £25.00 (£125 x 20%).

If the donor is 65 years old or above, their gross Gift Aid donations are also deducted from their taxable income when calculating age-related allowances.

Gift Aid donations from the self-employed are treated in the same way as gifts from individuals.
If someone runs their business as a partnership (which many professionals like lawyers, accountants, architects, etc. do), their donations will be eligible for Gift Aid in the same way as donations from individuals. Generally, the donation will be split into equal amounts from each of the individual partners, unless they decide it should be split differently and tell the charity that.

Donations to non-charities don’t carry any reliefs for the recipient or the donor.

Donations of stocks and shares and/or property have potentially complex implications for the Capital Gains Tax and/or Inheritance Tax status of the donor and hence you are strongly advised to take specialist tax advice if you plan to work with potential donors in this way.

What are the tax implications for limited companies making donations?

Limited Companies are taxed on their profits (their income minus their costs). Donations of money made to charity are deducted before the tax calculation, so that the resultant profit is lower and therefore the amount of tax payable is lower. A very basic example (using a company paying corporation tax at the small companies’ rate of 20%) shows the impact:

 

Company 1: No donation

Company 2: Making a donation

Income 200,000 200,000
Expenditure (100,000) (100,000)
Donation - (5,000)
Taxable profit 100,000 95,000
Tax at 20% payable to HMRC 20,000 19,000
(Note that a charitable donation isn’t allowed as a tax deduction if a company has made a loss or if the donation would turn a profit into a loss).

 

Company 2 has therefore spent £5,000 more in making the donation, but has saved £1,000 in tax. However, it has still spent £4,000 more than Company 1, so why might it be interested in doing that? The answer is essentially that being seen to do charitable work or make charitable donations is a good thing and makes customers and staff think better of an organisation.

Pete O’Hara is a Chartered Accountant who specialises in the arts and cultural sector.
www.peteohara.co.uk

This article, sponsored and contributed by Twine, is part of a series exploring the fundraising challenges faced by small touring theatre companies.