Receiving donations is common for any charity. These donations can take different forms – cash, services, property – but we’ll be discussing when your charity receives goods as a donation. Especially during covid, many charities saw an increase in donated goods. Whether it’s PPE, medicine, food, clothing, or more, it’s important for you to understand how to appropriately record the value of these donated goods in your records to ensure your charity is HMRC and government compliant.
What you’re required to do depends on the type of charity you are
While there are some broad guidelines all charities must follow, the details of what you’ll be required to do by HMRC is dependent on a number of factors. These include:
- Whether or not your charity is also a company or CIO
- The gross income of your charity for the relevant financial year (Less than £25,000, between £25,000 and £250,000, exceeding £250,000 but less than £500,000, etc.)
- Whether your charity is excepted or exempt from registration
The legislation around legal requirements for charities can be difficult to understand, especially when you factor in these different variables. For more guidance on exactly what requirements your charity has, we recommend consulting an accountant who specialises in this area. You can meet Saint & Co’s experienced Charities Team here.
Ensure your donations meet the requirements to be recognised as income
Donations to a charity that are recognised as income will meet the following three criteria:
- Your charity is entitled to the income of the donation
- There is reasonable certainty of receipt
- The value of the donation can be reliably measured
In most cases, entitlement to the income is met immediately when the donation is received. However, if a conditional donation is made, it’s only recognised as income once it’s clear the outlined conditions will be met.
If you’ve been promised a donation, you’ll only need to recognise it as income when it’s certain you’ll actually receive it.
Estimate a fair value for donated goods
The methods for determining the fair value of donated goods can vary depending on the type of charity you are and what is being donated to you. You can measure a donation’s value based on:
- The cost of the item to the donor
- The estimated resale value
- The actual value of goods once sold
For example, if you had PPE donated to your charity, you may measure the value of this donation based on how much it cost your donor to obtain the equipment. Alternatively, you could research how much similar equipment is being sold for by other retailers and measure your donation’s value by that.
If your charity plans to resell donated goods – like clothing, books, and homegoods at a charity shop – then you may have to record the value of your donations twice. You may first record the goods’ estimated fair value when you receive the donation as a contribution, and record it in your inventory. Once the donation is resold, you can record the actual value as revenue.
Keep diligent records
As with most aspects of your business’ finances, the best advice when it comes to donated goods is keeping thorough and up to date records. All the records for your charity, including cash books, invoices, receipts, Gift Aid records, and more, must be kept for at least three years and – in most cases – made available to the public upon request. This is to ensure your charity is staying HMRC compliant.
As a charity, you’re subject to a number of strict compliance and government requirements. It can be complicated to work out exactly what is expected of you and how you can structure the daily runnings of your business to fulfil all these requirements. At Saint & Co, our senior Charities team members all have a Diploma in Charity Accounting (DchA) and understand the unique priorities of your business.
Read more about how we can help you manage your finances, improve your reporting, and ensure compliance here.
