A new VAT relief encouraging businesses to donate everyday items to charity will be consulted on, the government has announced.
Under current rules, firms do not pay VAT on donated goods that are sold on, such as clothes, hygiene supplies and cleaning products.
But if those goods are distributed for free instead of sold, VAT must be paid.
The Treasury announced today it would consult on a new VAT relief for donations of “low-value household goods” to help encourage donations.
It is understood that questions around the definition of low-value household goods will be included in the forthcoming consultation.
The Treasury said a barrier to businesses donating goods to charities for people in need has “grown over recent years as firms have had to account for VAT on donations which are not for onward sale”.
Donations in the scope of the proposed VAT relief are items such as soap, toothpaste, toothbrushes and other hygiene products.
Second-hand items from hotels including sheets and kettles are also eligible.
Cleaning supplies including laundry detergent fit the criteria of the VAT relief.
The Treasury said the new VAT relief would not include goods that are donated to charities for their use, such as new IT equipment, in order to prevent VAT avoidance.
Nigel Huddleston, the financial secretary to the Treasury and a former civil society minister, said a 12-week consultation on the proposals would be launched before 23 July.
“We want the tax system to support donations to charity, not work against it,” he said.
“We are consulting on how a VAT relief might boost donations so we can get more items we all rely on every day to those in need and help to alleviate poverty.”
Andy Scott, principal tax adviser at the Confederation of British Industry, said removing the VAT penalty on donated goods would encourage businesses to support the growth of the civil society sector and the circular economy.
“The proposed VAT relief will lower the cost of generosity, allowing firms to extend their social impact without the deterrent of an additional tax expense or the administrative burden of valuing donated goods,” he said.
“We look forward to working with the government to shape a relief mechanism that maximises the potential for positive change in our communities and simplifies the tax system.”
Helen Dickinson, chief executive of the British Retail Council, said she hoped the consultation would “result in a meaningful change that will boost the charitable work of business in this country”.