Three VAT shifts you might have missed in the Budget

New VAT relief for business donations of surplus goods

The Treasury has published the outcome of its consultation on a proposed new VAT relief for low value goods which businesses donate to charities to be given away free of charge to people in need.

The objective of the relief is to remove a VAT charge that discouraged businesses from donating surplus stock or assets to charity (e.g. to food banks, community centres, refuges and shelters), often causing those goods to be destroyed or sent to landfill before the end of their usable lifespan. Under the current rules, businesses must account for VAT (or reverse the input tax they had previously recovered on those goods at the time of acquisition) when giving goods away in those circumstances.

After positive feedback from stakeholders, the government has decided to introduce this new relief with effect from 1 April 2026. The relief will excuse VAT registered businesses from accounting for VAT on donations of goods to a charity where their value falls below a certain threshold (£200 per item for white goods, furniture, flooring materials, computers, mobile phones and tablets, and £100 per item for other types of goods) and meets other eligibility criteria. 

The type of goods eligible for the £100 relief will not be too tightly defined in law, but the measure appears to be aimed at food products, personal hygiene products, clothing, household goods (such as bedding and kitchenware), surplus or end-of-life stock, and items returned by customers that are still usable but not suitable for resale. The relief will not be restricted to donations to charities with a specific objective of poverty relief - it will apply to donations to any registered charity.

Businesses who wish to make use of the relief will be required to obtain a certificate from the recipient charity confirming that the goods will be used or distributed for charitable purposes, and to keep records of the donated goods and evidence of their delivery to the charity.

This development means that many businesses who have previously been deterred by the VAT consequences might now be open to considering the feasibility of donating their surplus goods. This is good news for charities (particularly those involved in poverty relief or community activities) who are likely to welcome the prospect of increased donations of surplus goods, although they will be required to put a VAT certification system in place to support it.

The typical businesses that may wish to donate surplus goods to them, such as retailers, manufacturers and technology companies, will need to consider how to value the goods to ensure they meet the thresholds for VAT relief, which may be difficult for items whose value will be at the upper end of the thresholds, such as mobile phones and used IT equipment. As there is not much time before the new measure comes into effect, now is the time for potential business donors to begin planning what they might wish to donate and identify any valuation issues that may arise.

Behavioural penalties

HMRC has published a summary of responses to its cross tax ‘Reform of Behavioural Penalties’ consultation which, from an indirect tax perspective, confirms its intention to modernise penalties for errors/inaccuracies on a VAT return or for late notifications, such as of a liability to register for VAT.

Having listened to stakeholders’ views, HMRC plans to move forward with these proposals, focusing on easing the risk of penalties for prompt and voluntary disclosures, while strengthening sanctions against businesses who seek to evade tax and/or make deliberate errors. Not only is this expected to bring specific penalties for ‘repeated deliberate behaviour’ and a possible end to the penalty suspension regime, HMRC will also consider creating a new penalty category for ‘reckless’ errors.

The government will now develop draft legislation for further consultation and we await further news of its precise intentions and a target date for implementation. However, the prospect of a new penalty category for errors HMRC judges to be reckless is concerning – assuming that this new penalty category will sit somewhere between the current ‘careless’ (up to 30% of the potential lost revenue) and ‘deliberate but not concealed’ (up to 70%) levels, HMRC may be tempted to overuse a new power that allows them to apply a heavier penalty to errors without having to meet the higher standard of proof to fit the ‘deliberate’ categories.

While businesses do not yet have sufficient detail of the government’s plans and their timing to prepare in earnest, changes to the current penalty system are definitely on their way. This news fits into an emerging theme of an overall increase in HMRC scrutiny and censure for taxpayers, which is also indicated by its increased use of random inspections and ‘nudge letters’ to encourage disclosure of possible VAT errors.  All businesses, especially those covered by the Senior Accounting Officer or Business Risk Review regimes should watch for further developments.

Coming soon: New VAT relief for housing associations

This year’s Budget publications included a brief tease of a forthcoming consultation on changes to VAT rules to ‘incentivise the development of land intended for social housing’. So far HMRC has given no further details of the underlying issue or indicated when the consultation will be launched, but we understand that this may refer to  plans to create a new zero-rate relief for the sale of bare land to registered providers of social housing.

Currently, VAT is chargeable on building land that is subject to an option to tax by the vendor, which housing associations are not entitled to recover in full. As a result, many choose to set up a ‘golden brick’ arrangement where title to the land does not pass from the developer to the housing association until construction has progressed above the level of the foundations, at which point it becomes a zero-rated supply of new homes under construction.  

If HMRC has indeed decided to make zero-rating available to housing associations at an earlier stage of the process, this change would be welcomed by the sector as it should ease cash flow pressures and reduce the administrative costs incurred on building new social housing on opted land. Developers and housing associations should look out for publication of the consultation document and news of a target implementation date.

For further guidance, please contact Sarah Halsted and Karen Robb