Charities across the UK are always on the lookout for businesses to help support them. From their point of view, businesses are often able to donate larger amounts than individuals, and can even build ongoing relationships to support them. But what benefits do businesses get from donating to charity? Other than the warm fuzzy feeling you get from supporting a good cause, is there any incentive for businesses to donate their hard-earned money to charity?
Why yes, there is! As it turns out, donating to charity as a limited company can benefit your bank account, because it can lower your corporation tax bill. And who doesn’t love a legal way to pay the taxman less?
How Can Giving to Charity Reduce My Corporation Tax Bill?
When a limited company donates to a UK-registered charity, it can almost always deduct the full value of the donation from its taxable profits. This then brings down the amount of corporation tax you have to pay. Let’s look at an example:
Say your company earns £80,000 in profit. You choose to make a charitable donation of £5,000. Now, only £75,000 will be the subject of corporation tax. If you’re taxed at the standard rate (which is 25% at the time of writing), then this could mean a saving of £1,250 in tax. Nothing to sniff at! And of course, the more you donate, the more you save.
Ways to Donate
There are a few different ways you can give to charity, and the method you choose will depend on what you want to achieve and what will most benefit the charity.
Cash donations: This is the simplest and most common method. Just give them some money! Preferably by bank transfer, as it’s easiest to account for. The amount you donate can then be deducted from your pre-tax profits when HMRC calculates your corporation tax bill. If you’re choosing this option, it must be a monetary donation, and there must be no benefit received in return.
Sponsorships: Sponsorships are a different way to support charities than donations. Because while you’re still giving them money, here you receive something in return – usually advertising or PR. These are then treated as business expenses, not donations, and can still reduce your corporation tax liability. Sponsorship benefits you can get to be eligible include things like your logo on charity materials or event banners, mentions on the charity’s website, and social media promotion. In these cases, your donation is treated as marketing spend, rather than as a charitable gift.
Donate goods or equipment: It’s not just money you can donate. You can also donate trading stock and even equipment to charity. If you do this, you won’t need to include the value of what you donate in your turnover, reducing your taxable profits. If you’re donating equipment, like IT hardware or tools, you might even be able to claim capital allowances or avoid balancing charges. If you’re donating trading stock, you’ll need to make sure it’s transferred without payment and record the market value. Either way, it’s worth chatting to your bookkeeper to make sure it’s all done and recorded properly.
Payroll giving: Otherwise known as ‘seconding employees’. Here you can temporarily ‘lend’ one or more of your employees to work with a charity. Many businesses do this either on an annual or monthly basis, allowing their employees to volunteer for a charity of their choice. You still pay them their salary or wages for that time, and they still accrue pension, holiday and other entitlements, but you can then deduct the cost as a business expense. This is a very popular option for any companies looking to improve their corporate social responsibility programmes, as well as professional services firms wanting to offer pro bono work.
Donate land, property or shares: If you choose to gift land, property or shares to a charity, this will also qualify you for corporation tax relief. But there are a few things you need to do to make HMRC happy:
- Transfer the legal title to the charity.
- Get a certificate from the charity acknowledging the donation.
- Keep detailed records for tax purposes.
Gifts of this nature must be irrevocable.
Some Key Rules for Tax Relief
Given all the benefits put in place to encourage limited companies to donate to charities, it’s not surprising that there are some rules in place as well. These are to make sure that the donations are viable, legitimate, and that no one can use the system for gain. The rules are:
- Donations have to be made to a UK-registered charity or community amateur sports club (CASCs).
- If the business receives benefits (like tickets to an event) in return for a donation, the value of those benefits has to fall below certain limits.
- Donations can’t be used to increase the company’s losses.
- You can’t reclaim VAT on charitable donations, unless the payment qualifies as a business transaction (like sponsorship with advertising value).
How to Claim
The good news is, you don’t need to fill in a separate form to claim corporation tax relief on charitable donations. After all, HMRC want it to be as easy as possible for businesses to donate to good causes! Instead, you just need to report all charitable donations on your company tax return. You just need to include:
- The name of the charity or charities receiving the donations.
- The total amount you donated during the accounting period.
- The nature of the donation (if it was cash, sponsorship, donated goods or services).
- The date of the donation or dates, if you made more than one.
In order to do this, you’ll need to keep good records of supporting information, including:
- Bank statements or receipts confirming payment.
- Gift Aid declarations (where relevant).
- Any correspondence with the charity.
- Sponsorship agreements or valuation of donated goods or services.
All of this means you need good bookkeeping! That’s where I come in. At Bluebell Bookkeeping and Admin, it’s my job to make sure your books are kept up to date and in order, and you have everything you need on hand for your tax returns, VAT returns and corporation tax filings. I can also help you find ways to save money or to donate more effectively, to help bring that bill down as much as possible. If you’d like to know more, just get in touch with me today, and I’d be happy to help.