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HMRC internal manual

VAT Valuation Manual

Apportionment of monetary consideration: whether any part of a payment can be treated as outside the scope of VAT

A common argument that you may encounter from traders is that part of the payment for a supply or group of supplies can be treated as an outside the scope donation because the supplies are not “worth” the money that has been given for them. Any type of trader may raise such an argument, but the schemes in question will normally bear all or some of the following characteristics.

  1. The trader will often (but not invariably) be a charitable or other non-profit making organisation seeking to raise funds for a particular purpose or cause from the general public.
  2. The money invited from the public is likely to be referred to as a “donation”, “contribution” or “sponsorship”. Sometimes the payment can be formalised as a subscription.
  3. Anything provided to contributors is likely to be expressed as being a “token in gratitude for voluntary support” or, “only being offered as an inducement” to encourage persons to donate to the cause.
  4. There will be a specified level of payment at which supplies to the contributors will be generated. For example, “If you send a contribution of at least £20, we will give you X in acknowledgement of your support”.
  5. The sum of money generating the supplies will exceed the price for which they would normally be sold.

The traders’ argument rests upon the assumption that the supplies made have some “normal” or “customary” value and that, because they are provided for a payment in excess of that sum and are “for a good cause”, then the excess can be regarded as outside the scope. Section 19(4) may be quoted in support because it refers to “matters” other than a supply to which the consideration relates. Because one such “matter” is a donation, so the argument goes, then the consideration can be disregarded to the extent that it comprises the donation.

That argument is flawed in three material respects:

  1. For VAT purposes, there is no “normal” value for a supply, the consideration is the amount of payment that results in a supply being made, and it is irrelevant that in other situations the consideration given may have been higher or lower. The question is whether the supply was made in return for £X, not was it worth £X.
  2. The reason why the trader charges a particular amount for a supply or, the recipient is prepared to pay that amount, are irrelevant to whether or not the amount constitutes consideration.
  3. No part of a consideration can be a donation. A donation is a freely given payment in return for which nothing is supplied at all. A consideration is payment for a supply. Therefore, no part of a consideration can be a donation by the very definition of those terms. Since section 19(4) only operates to apportion the value of a consideration, it cannot be used to attempt to identify part of that consideration as a donation.

This matter was put beyond doubt in the Court of Sessions appeal of Tron Theatre Ltd (COO5144T). This case has been followed by another Tribunal in the case of High Peak Theatre Trust Ltd. (MAN/95/1108X).

Tron Theatre instituted a “seat-sponsorship scheme” in order to obtain additional funds for refurbishment of the theatre. Members of the public were invited to sponsor a seat in the theatre for payment of £150. Tron published a brochure which listed the benefits to sponsors as “Personalised brass plaque displayed on each seat. Acknowledgement on a board featured in Tron Theatre’s main foyer. Limited edition print by Glasgow artist Johnny Taylor specially commissioned by the Tron to commemorate this major appeal. Priority booking for two gala evenings when we will unveil the new seating and celebrate in grand style”.

The benefits would not be supplied for less than £150, although payments above £150 would be accepted. Before the Tribunal, Tron argued firstly that the whole £150 was a donation, which the Tribunal rejected, and, secondly, that under section 10(4) of the VATA 1983 (now S.19(4) of the VATA 1994), part of the £150 was represented by a donation. Tron won this second argument at tribunal. Customs appealed to the Court of Sessions on the ground that the Tribunal had erred in law as the £150 was wholly consideration for the above benefits - as those benefits were only supplied in return for £150 then all of the £150 had to be the consideration for them. Section 10(4) would only have been relevant in apportioning the £150 if those benefits had been of different liabilities. The Court found in Customs’ favour, holding that all of the £150 was the consideration for the package of benefits supplied by the theatre.

The basic legal rule therefore is that once a payment has been established as the consideration for one or more supplies there is no scope for treating any part of it as a donation.

There are, however, two circumstances in which it has long been our policy to recognise an element of donation on an informal concessionary basis.

  1. In some circumstances we have been prepared to regard a supply as so minimal that we disregard it on a de minimis basis. This has been done with sponsorship schemes where the “sponsor” receives nothing more than a simple acknowledgement of their support. Consequently, the payment is not treated as consideration and valuation is not necessary. In cases of doubt, the supply position should be resolved before you move on to consider the question of valuation.
  2. Subscriptions to certain types of organisation can occasionally be viewed as partly outside the scope of VAT if certain conditions are met. You can find out more about this in VAT Business/Non-Business (VBNB).