We sometimes have situations where a client on IB, typically with a learning disability, is offered say 35 hours per week work for say £60 per week cash in hand. Taking them into supported permitted work we cannot condone such informal arrangements (national minimum wage and other employment rights)so the question then comes up of whether they can do one day as formal supported permitted work plus 4 days volunteering doing exactly the same things. The general view seems to be "no" but I'm not sure of the reasons. The concept of notional earnings (client is doing a job unpaid when payment would normally be made for the same work) was hit on the head by CIB/1650/2002, reflected in DMG 15330-15333, so shouldn't be a problem. CPAG p766 warns that "the mere fact that you do not accept a wage will not necessarily mean that you are a volunteer" and refers to the Incapacity for Work Regs 2(1) but this simply defines a volunteer as someone who receives only expenses.

Does this exclude somone from being employed one day and a volunteer other days doing the same thing?

I think that the problem is as much to do with the risk of falling foul of the National Minimu Wage as to do with benefits law. The DTI produced a detailed briefing paper on the NMW and permitted work in 2000. It is available at http://www.dti.gov.uk/er/nmw/therapeutic.pdf
and includes the following scenario:

"A client undertakes four hours voluntary work, in addition to
paid work in the organisation. He works the additional hours
voluntarily and could go home if he chose.

"Analysis
This is less clear cut than scenarios 6 and 7. The individual does
paid work and unpaid (‘voluntary’) work for the same organisation.
A tribunal would need to determine whether the extra hours were
genuinely outside the contract, or whether there was some
expectation of this extra work from the employer and that this was
simply a device to minimise the hours to count when calculating
the minimum wage. A tribunal might also want to know if the type
of work that the individual carries out differs in any way between
the two circumstances."

So far as incapacity for work is concerned, I can't see that there'll be a problem - not in law anyway. Reg 17 SS(IFW)regs defines the categories of exempt work; volunteering and permitted work being two seperate and distinct categories.

The meaning of volunteer given in reg 2 is straightforward and says:
'"volunteer" means a person who is engaged in voluntary work otherwise than for a close relative, where the only payment received by him or due to be paid to him by virtue of being so engaged is in respect of any expenses reasonably incurred by him in connection with that work'

The most obvious problem would have been the notional earnings rule, which you have already dealt with.

The only thing is the PCA. If the DWP suspect that the nature of the work or the amount of work (even voluntary) suggests the the claimant is not IoW, they can/will apply the PCA.