A charity may receive payments from a bank, building society or other financial institution in return for the charity endorsing that institution’s credit card and recommending its use to the charity’s members or supporters. Such cards are normally referred to as “affinity credit cards” and bear the name of the charity.

If a charity acts as an intermediary in bringing together a credit card provider with its members, any payment from the credit card provider to the charity will be exempt from VAT where certain conditions are met.

In many cases, however, a charity does not act as an intermediary but receives a payment from the credit card provider for each new card taken out and then a small percentage of the ongoing turnover from the credit card. HMRC allows the charity to treat part of the payment as a donation and therefore outside the scope of VAT. The remainder is subject to VAT in the normal way.

To benefit from this treatment there must be two separate agreements:

• the first agreement, usually between the charity trading subsidiary and the card provider, should provide for the supply of the necessary marketing and publicity services and access to membership lists and other promotional activity for the card (marketing services) – these supplies are subject to VAT, and
• the second and separate agreement between the charity and the card provider should provide for contributions to be made by the card provider in respect of the use only of the charity’s name and/or logo – contributions made under this agreement can be treated as outside the scope of VAT

The concession states that at least 20 per cent of the initial payment should be treated as the consideration for the standard-rated business supplies by the charity. The remaining 80 per cent (or less) of the initial payment, and all the payments based on turnover, will be outside the scope of VAT. The arrangements work in the same way for the purposes of corporation tax.

This is a specific concession and does not apply to other joint promotions with financial institutions.

For further information see Chapter 8 of HMRC VAT Notice 701/1: charities and VAT.