Customs and Excise has said that the display of corporate logos by charities to acknowledge donations is a form of advertising for the companies involved and should be subject to VAT. This means donations will be hit by the 17.5 per cent charge if the policy is enforced.
Charities frequently acknowledge corporate financial support by reproducing company logos on their print or TV advertising, or on their websites.
But the practice could lead to the donations being reclassified as payments for advertising or sponsorship, and charities being forced to charge VAT.
Customs has spelled out its policy in correspondence with accountancy firm Deloitte. It has said that the use of corporate logos is a supply of advertising and subject to the standard rate of VAT. Deloitte is disputing the interpretation.
"We argue that Customs has to accept that the donations are genuine, even if the company possibly also wants to bask in the reflected glory of being a good corporate citizen," said Deloitte head of charity VAT Tony Jaras. "They are still donations."
Deloitte has suggested a compromise whereby 20 per cent of the donation is subject to VAT and the rest is tax free.
"But Customs has refused to budge, saying 'where there's a corporate logo, we want VAT'," said Jaras.
However, although Customs has officially adopted the policy, there is little evidence that VAT officers are enforcing it on the ground.
Nick Kavanagh, chair of the Charity Tax Reform Group, said that if donations were to be taxed, charities could invoice companies for the donation and charge VAT, which the companies could then recover, leaving the donation intact.
But he said that the group wanted Customs to align its policy with that of the Inland Revenue, which allows corporate logos to escape corporation tax if they are used discreetly.
Andrew Watt, deputy chief executive at the Institute of Fundraising, said: "Customs' policy is a little bit unreasonable and we are in discussions with them to get it changed."
Jaras claimed that the Customs position could be challenged. "We believe there should be room for flexibility. Customs' current position is perhaps a little outdated. Most people nowadays would see the logos primarily as an acknowledgement."
Customs and Excise argues that the display of corporate logos by charities is a form of advertising and should therefore be subject to VAT
If this policy is enforced, it could result in donations being taxed at 17.5 per cent
Although Customs has officially adopted the policy, there is little sign of it being enforced by VAT officers on the ground
The policy has been criticised by charities' representatives groups, including the Charity Tax Reform Group and the Institute of Fundraising.