Can sole traders give to charity and get tax relief?

If you’re self-employed, it is easy to make charitable donations, but they aren’t treated in the same way as other business expenses.

As there is no legal separation between you and your business, HMRC views any charitable donations as having been made personally, rather than via the business.

As a result, any funds you donate can’t be accounted for in the same way as normal business running costs.

In this exclusive guide, Michael McCullion, director of Bright Ideas Accountancy, explains that sole traders can still claim tax relief, but it should be claimed personally via Gift Aid.

You can read HMRC’s official guide to donating to charity and Gift Aid.

Are charitable donations a business expense?

In most cases, no, they’re not.

For an expense to be tax-deductible, it has to be incurred wholly and exclusively for the purposes of your trade.

A donation to charity doesn’t qualify under this rule, even if it’s work-related.

So if you pay £200 to a charity from your business account, the transaction should be treated as drawings rather than a business expense.

This might seem like a petty rule, but if HMRC ever asks to review your accounting records, this type of transaction could be challenged later.

So how do you get tax relief?

If you’re a sole trader, you can get tax relief via Gift Aid, not through your business accounts.

Gift Aid works on the basis that you’ve already paid tax on the income you’re donating.

The charity then reclaims basic rate tax from HMRC.

If your business makes a £40,000 profit.

You donate £1,000 to charity.

• your taxable profit remains at £40,000
• the £1,000 is not deducted as a business cost
• the charity can claim Gift Aid
• you may claim extra relief if you’re a higher-rate taxpayer

If you pay higher-rate tax, you can usually claim additional relief through the Self Assessment process.

So, you can still gain tax relief, but it’s applied to your personal tax position, rather than reducing your business profits.

What about donating goods or services?

This is where the rules are less clear-cut, but many sole traders avoid doing this to avoid overcomplicating things.

If you donate stock or equipment, you generally don’t get the same kind of tax relief as you would with a cash donation through Gift Aid.

And if you provide services for free, there’s usually no tax deduction either, because no expense has actually been incurred in an accounting sense.

There may be situations where there is an overlap between marketing costs (which are usually tax-deductible) and sponsorships, but this is a grey area, and something we recommend you talk to your accountant about.

The rules are different for limited companies

There is a significant difference in the tax treatment of charitable donations between sole traderships and limited companies.

With a limited company, the donation is made by the company, not by its directors on a personal basis, which means the tax treatment is different.

In many cases:

• charitable donations can be deducted from company profits
• this reduces the Corporation Tax bill
• Gift Aid is not usually part of the process

This means that donations are usually tax-deductible against the company’s Corporation Tax bill.

You can find out more in our guide to limited company expenses.

Summary

If you’re self-employed, you can still give to charity and get tax relief; it’s just that any donations aren’t treated as business expenses.

To keep your accounts clean and accurate, separate any donations from your business, use Gift Aid where applicable, and keep a record you can refer back to later if needed.