Charities and community groups face ongoing challenges, with 16 million people in the UK living in poverty – the highest level since records began, according to the Social Metrics Commission. The cost of living crisis has worsened things, pushing two million more people into severe hardship since 2019.
At the same time, demand for donations has surged, with 78% of charities reporting increased need, according to Neighbourly’s recent community survey, especially for non-food items like toiletries, clothing and hygiene products.
Retailers are well-positioned to support, as they often have surplus stock and are located in the heart of communities, usually with strong relationships with local groups. However, the requirement to pay VAT on charitable product donations for direct use has created a barrier to giving.
While the previous government promised a consultation earlier this year, policy changes have not yet been confirmed. With charities facing cost pressures due to NI increases and lack of funding, all while facing increased demand, support such as the donation of goods from external organisations is more vital than ever.
Neighbourly recently met with both the British Retail Consortium (BRC) and Confederation of British Industry (CBI) to discuss the state of play on the consultation to continue to campaign for tax relief on donations for direct use, as it looks to ensure much needed support reaches communities.
The importance of tax relief for incentivising giving
Currently, VAT regulations mean it is often financially unviable for retailers to donate their unsold goods. Disposing of those goods often incurs lower costs, creating a further barrier for donating surplus stock to charities in need.
Meanwhile, according to our most recent survey of community groups, more than three-quarters (78%) reported an increase in demand over the past three months, with 50% saying there are people they simply can’t help due to limitations in either capacity, funding or both. In addition, household essentials, toiletries and hygiene products were among the most requested products.
Enabling tax relief for these donations could have the effect of increasing resources for these community groups by millions of pounds, according to the BRC.
“Retailers and charities want to work together to increase the number of donations made to directly support people in need,” says BRC CEO Helen Dickinson. “Removing VAT on donated products for direct use would remove a major hurdle for retailers, empowering them to do more to close the needs gap and help towards the wellbeing and resilience of local communities.”
Supporting sustainability goals
Removing VAT from donations for direct use also supports sustainability goals for both businesses and government. Surplus goods that are not donated can end up in landfill, contributing to environmental degradation.
One potential concern is that the removal of VAT on donations could lead to abuses of the system, with sales being labelled as “donations” to avoid VAT obligations. However, with several major retailers backing the change, and amid wider reform towards greater transparency, whether through the EU’s Corporate Sustainability Reporting Directive or calls from retailers for mandatory food waste reporting, there is little reason to believe this would be widespread.
What’s more, tech platforms that allow businesses to report clearly on where they have donated surplus can help firms with their reporting commitments, providing reassurance and transparency to HMRC that the donations are being used, rather than being sold on or disposed of.
How VAT policy change can fuel business growth
Providing VAT relief on goods donated for direct use is also a vehicle for business growth. Customers are more likely to trust organisations that have ethical practices. Indeed, our recent survey found that 62% are more likely to trust a company that contributes to its local community.
Developing partnerships with local charities can also help boost the economic health of local communities, which in turn can fuel business growth due to increased economic participation.
At a time when the government is understandably seeking to raise tax income for the public purse, we urge it to consider alternative approaches to address the growing need for everyday essentials.
As well as supporting the economic resilience of local communities and charities, the VAT removal would support the government’s own ambitions on avoidable waste and fuel strong partnerships between community and business. We invite retailers who want to be part of this change to get in touch – and help us bring about this reform for the benefit of all.
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