The first point to be aware of is that, even if the profits are donated, output VAT will still need to be accounted for, based on the liability of the goods, and on the full selling price of the merchandise. While there are special rules concerning sales of donated goods where the proceeds are donated to charity (details can be found in HMRC Guidance Manual VCHAR7200) in this case the goods are not donated, and the recipients of the donations are not charities.
The sale of the goods has a wholly taxable business purpose; therefore, there is no requirement for the band to make any input tax adjustment in relation to the costs of acquiring or selling the goods.
The donation itself will be outside the scope of VAT when received by the Crew. There is no link between the payment and any services to be provided by the crew.
Similarly, donations made by customers on the website, when freely given, are not consideration for any supply of goods or services and will also be outside the scope of VAT. The principle here is the same as that for tips or gratuities, which are outside the scope of VAT when paid without any requirement to do so.
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