VAT treatment of third sector “Friends” schemes

A recent VAT Tribunal decision Serpentine Trust Limited (TC03992) has cast some doubt on the established practice, for charities to treat income received from “friends” packages as a donation and therefore outside the scope of VAT.

In this tribunal, the appellant ran an art gallery and offered 5 levels of membership to its supporters.  Each scheme had fixed price and had set benefits attaching to it.  The appellant argued that the benefits were minimal in the context of the price for each level of membership and therefore were not payments for a consideration, so no VAT was due on the payments received.  When that argument was unsuccessful, the gallery then tried to argue that the elements of the package should be split in accordance with their respective VAT rates.  A donation element being outside the scope of VAT, and a magazine element being zero rated.

Both arguments failed and the outcome was that the gallery had to pay VAT to HMRC on the full value of the supporter scheme.  It has since revised its procedures following a direction by HMRC.  They now show the donated elements separately on all supporter scheme literature, which HMRC accept in the donated element as being outside the scope of VAT.

Any organisation that operates similar “friends” schemes should consider whether they should be reviewed in light of this decision.

If you think that your organisation may be affected, contact our VAT Senior Manager Iain Masterton on 0131 558 5800 or email