Charitable Donations as a Sole Trader

[BigTree]

I have a few products where an amount is donated to a specific charity for ever sale. However I'm not sure I've been including it in my self-assessment correctly.

The company is run as a Sole-trader and is not registered for vat (under threshold).

I think there are two ways of doing this.

1. Sales/Profit included in tax return as normal. Donation is made to the charity and amount is included on the Charitable Donations section of tax return. [Income tax is added and Charity can then claim Gift Aid on your contribution (correct?)].

2. Donation is accounted for as an expense of the sale. No income tax is paid on the donation but the charity cannot apply for gift aid on your donation as no tax has been paid on it.

Questions being...
Option 2 is easier but is it legal/correct?
Is option 1 correct and are there any advantages?

Many thanks in advance of your help.

 

[UK Contractor Accountant]

Option 1 is the way to go but only if you have signed the gift aid declartion when making payment to the charity.

 

[BigTree]

Wouldn't his mean I'm paying the donation plus tax on top?

For example if the contribution from my sales amounted to £1000 would I therefore be paying another £200 (ish) on top in income tax?

 

[David Griffiths]

Option 1 is correct. Option is not and is therefore not an option, so to speak

Yes you pay tax on the income, but the charity claims tax back so gets more than the £1,000.

 

[BigTree]

Okay that's understandable. The donation will likely be around £5k so I'm going to have to factor the tax cost before I say how much I'll be donating per sale. Otherwise if I'm donating 100% of my margin I could be hit with a large loss.

Thankfully not started selling the product yet!