VAT on donated goods sold by charities

When a charity, or a trading subsidiary that passes its profits to the charity, sells or hires out goods that were donated to it, the sale is zero rated under Group 15 of Schedule 8 to the Value Added Tax Act 1994. The goods must be offered to the general public (or to at least two disabled people or people on certain benefits), must not have been used for anything else first, and must not be sold under an arrangement made before they went on offer. Bought in goods and goods sold as agent under Retail Gift Aid do not qualify.

Where does the zero rate come from?

Section 30 of the Value Added Tax Act 1994 zero rates the supplies listed in Schedule 8. Group 15 covers charities, and three items deal with donated goods:

• Item 1: the sale, or letting on hire, by a charity of goods donated to it for sale, letting or export.
• Item 1A: the same supplies by a taxable person who is a profits to charity person in respect of the goods, which in practice means a trading subsidiary.
• Item 2: the donation itself, when goods are given for sale, export or letting by a charity or such a taxable person. This lets a VAT registered business give stock to a charity shop without accounting for output tax.

HMRC’s VAT Notice 701/1, How VAT affects charities, explains the relief at paragraph 5.5.1. Community amateur sports clubs cannot use it: paragraph 3.42.20 of HMRC’s Gift Aid guidance says no VAT reliefs are available to them.

When does a trading subsidiary qualify?

Note 1E to Group 15 says a taxable person is a profits to charity person in respect of goods if it has agreed in writing, whether or not by deed, to transfer its profits from supplies and lettings of the goods to a charity, or if those profits are otherwise payable to a charity. Notice 701/1 describes this as a subsidiary that distributes its profits to the parent charity. A written agreement to transfer profits is the simplest way to show this; if neither limb is met, item 1A is not available.

Gift Aiding profits up to the charity is a separate direct tax question, covered in our page on charity trading and subsidiaries.

What conditions must the sale meet?

Note 1 to Group 15 sets two conditions for items 1 and 1A. First, the sale or letting must take place because the goods were made available, in a shop or elsewhere, either to the general public or to two or more specified persons. Note 1C defines a specified person as someone who is disabled or entitled to one of the benefits in Note 1D, which include universal credit, housing benefit, income support, income based jobseeker’s allowance and working tax credit. Second, the sale must not result from any arrangement, legally binding or not, made before the goods were offered, between the buyer and seller or between the donor and either of them.

Note 1B adds a third requirement. If donated goods are used for any purpose other than, or as well as, being available for sale, hire or export before they are sold, the zero rate does not apply. Notice 701/1 gives the example of donated office furniture that the charity uses in its own offices before selling it.

Some points that often come up:

• Scrap and rags. Paragraph 5.5.1 of the notice says goods that safety rules prevent from being sold to the public, such as some second hand toys and electrical items, still qualify when sold to scrap merchants, as does scrap clothing sold to rag merchants.
• Hire. Note 1A says goods count as donated for letting only if they are donated to be let and relet, and then sold, exported or disposed of as waste when no longer let.
• Fundraising events. Donated goods sold at a qualifying fundraising event, for example at an auction, are zero rated. Bought in goods sold at such an event are exempt instead (paragraphs 5.5.2 and 5.5.3). See our page on the charity fundraising events exemption.
• Online sales. Note 1 refers to goods made available in a shop or elsewhere, so the place of sale is not the test; the conditions above are.

What does not qualify?

• Bought in goods. New stock such as cards and gifts is standard rated unless the goods are zero rated in their own right, for example books or children’s clothes (paragraph 5.5.3).
• Goods sold as agent under Retail Gift Aid. These goods still belong to the individual, so the shop is supplying a selling service. Its commission is standard rated if it is VAT registered, and VAT on costs that relate directly to those goods, such as electrical testing, is not recoverable (paragraphs 3.42.18 to 3.42.23 of the Gift Aid guidance). The mechanics are in our page on the Retail Gift Aid scheme.
• Pre arranged sales. For example, a donor who gives a car to a charity on the understanding that a particular friend will buy it falls outside Note 1(b).
• Goods used first. Anything the charity uses before putting it on sale, under Note 1B.

How does the donor’s side work?

Paragraph 5.5.4 of Notice 701/1 says a VAT registered business can zero rate a donation of goods to a charity or its trading subsidiary if the goods are to be offered for sale. That is item 2 of Group 15.

Goods donated for other uses are covered by a newer relief. From 1 April 2026 a business does not have to account for VAT when it donates goods to a charity for onward donation to an individual, another charity or another organisation, or for use in the charity’s non business activities (paragraph 5.5.5). Before that date a deemed supply arose where input tax had been recovered on the goods. The relief applies item by item: the general limit is £100 an item, rising to £200 for household appliances, furniture including mattresses, flooring, computers including tablets, and mobile phones. Alcohol, tobacco and dutiable vaping products are excluded, and the business should hold written evidence of the charity’s status. Gifts outside these reliefs follow the normal rules in our page on VAT on business gifts and samples.

Does zero rating affect registration and VAT recovery?

Zero rated sales are taxable supplies. Notice 701/1 (section 3.2) says taxable sales include those at the zero rate, so a busy charity shop can take a charity or its subsidiary over the VAT registration threshold even though no VAT is charged. The notice also confirms that input tax incurred in making zero rated supplies is recoverable, and that a body whose business activities are wholly zero rated can register. VAT on costs attributable to donated goods sales can therefore be reclaimed, subject to any apportionment for non business or exempt activity under section 3.7 of the notice.

How does this look in practice?

Illustration only. A charity’s trading subsidiary has a written agreement to pay all its profits to the charity. In a quarter its shops take £30,000 from donated clothes and books, £5,000 from bought in Christmas cards and £2,000 commission on Retail Gift Aid sales.

• £30,000 donated goods sales: zero rated under item 1A.
• £5,000 bought in cards: standard rated, so the £5,000 includes output tax.
• £2,000 Retail Gift Aid commission: standard rated as a selling service.
• Input tax on shop running costs is recoverable, except VAT on testing the Retail Gift Aid electrical items.

If a volunteer had taken a donated desk for the shop’s back office for a few months before selling it, that sale would be standard rated under Note 1B.

What mistakes come up most often?

• Zero rating sales by a subsidiary with no written profit transfer commitment.
• Treating Retail Gift Aid goods as donated goods, or zero rating the commission.
• Zero rating bought in stock because it is sold in the same shop.
• Agreeing to reserve a donated item for a particular buyer before it is put on sale.
• Using donated items in the charity’s own premises and then selling them at zero.
• Ignoring zero rated turnover when monitoring the registration threshold.

For the zero rates and exemptions that apply to what charities buy, see our page on VAT reliefs for charities.

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Related Accountapedia entries

• Gift Aid donor benefit limits
• Gift Aid claims by charities
• Do I charge VAT when selling business assets
• Recognising Gift Aid in charity accounts
• Tainted charity donations rules
• VAT on goods sold abroad that never enter the UK
• VAT on goods sold into the UK under £135

Sources

• legislation.gov.uk: Act 1994 c. 23, schedule 8
• GOV.UK: How vat affects charities notice 7011
• GOV.UK: Chapter 3 gift aid

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.