Sponsorship arrangements are common in a wide range of sectors, both commercial and charity; commercial organisations sponsor charities, and charities associate themselves with commercial organisations and products. The reason any organisation, whether charitable or commercial, enters into these type of arrangements is because such associations are perceived to be beneficial to all parties involved in terms of promoting, advertising, raising their profiles etc. Sponsors, whether commercial or charitable, will usually receive benefits related to their sponsorship. Such benefits can range from an acknowledgement on a list of supporters to the naming of an event after a sponsor.
In contrast a donation is something that is entirely freely given, with the person or organisation making the donation receiving nothing in return, and is consequently outside the scope of VAT.
If a sponsor receives benefits directly linked to their sponsorship then there is a supply for VAT purposes. Everything given by the sponsor constitutes the consideration for the supply. There are, however, a few exceptions that relate specifically to charities. Detailed guidance on sponsorship can be found in Notice 701/41 (HMRC website) Sponsorship.