Sarah Williams highlights the VAT and Gift Aid implications for the treatment of funds raised by volunteer runners and the imposition by charities of minimum fund-raising targets.
The New Year will have seen an increase in runners out on the streets, putting new resolutions into effect. Many of these may also be training for a spring marathon, perhaps also raising funds for charity and/or running on a charity place. While the runners face their particular challenge of 26.2 miles to the finish, charities have their own challenge of ensuring they maximise their fundraising, without falling foul of the tax man.
According to the Virgin London Marathon Website, the London Marathon is 'the largest annual fundraising event on the planet', with runners having raised 'over £500 million for good causes since the race began in 1981'. Such events offer great fundraising opportunities for charities, but most charities will also be able to tell you that they have been stung by runners who promise the earth but fail to deliver on their fundraising targets. Many charities are seeking to get tougher on these faux fundraisers, who waste valuable gold and silver bond places. However, in their efforts to maximise funds raised, charities have to beware of the tax traps.
Much of this fundraising relies upon pledges. Where the charity asks the runner to pledge to raise a certain minimum amount of money, but allows the runner to take part in the event whether or not they meet the pledge, no VAT will be due on money raised by the runner (subject, as will be seen below, to the runner not also receiving any benefits). However, this relies upon the runner’s goodwill in fulfilling the pledge. If, on the other hand, the charity requires the runner to raise a certain level of funds for the charity before being allowed to participate, HMRC will treat this as equivalent to an entry or registration fee which will be taxable at the standard rate. That said, any payments over the threshold required by the charity could still be treated as donations and outside the scope of VAT.
Can charities offer benefits to their runners to encourage them to succeed? HMRC consider that if a charity provides benefits or gifts to its runners (for examples bikes, watches, free travel and accommodation) then the amount raised by the runner will be taxable at the standard rate of VAT. HMRC accepts, however, that certain provision by a charity to its runners will not be regarded as a benefit for these purposes, eg the provision of free training and health advice or a post-race reception and free massages at the event. Similarly, prizes offered to top fundraisers are not treated as benefits for VAT purposes.
The gift aid scheme increases the value of donations to charities, but a donation must be freely given. If charities contractually oblige their runners to raise a certain amount of money (or personally to meet any shortfall in their fundraising commitment), the money is no longer a pure donation, but an amount paid pursuant to contract. As such, it would be ineligible for gift aid, and liable to tax.
If participants receive any benefits above permitted limits, this can affect the eligibility for gift aid of funds received from them. For example, if a charity does not charge its runners the full cost of a gold bond place, HMRC will regard the discount received by the runner as a benefit. If that benefit exceeds the gift aid donor benefit limits, it will disqualify from gift aid any donation from the runner. Similarly, any person connected to the runner for these purposes (such as a spouse, civil partner or close family) will be deemed to receive an equivalent benefit, thereby jeopardising gift aid on any sponsorship raised from them.
Of course, tax (direct and indirect) is not the only consideration when weighing up the risk of a runner failing to honour a pledge as against the option of imposing a legal obligation. For example, there are reputational aspects too – will the charity want to pursue failed fundraisers for payment? Might it put undue pressure on runners who are ill or injured to run for fear of the financial consequences otherwise? Popular events are highly competitive for charities, as well as participants: might it deter potential supporters? The key perhaps is in refining the application process to try and weed out those who are simply in it for the personal challenge and not committed to the bigger cause. If in doubt, charities should seek specialist advice to help them identify the potential risks and benefits of different options, and to maximise their return from these events.