gift aid Archives - London Chartered Accountants Blog

In April 2013, a number of enhancements to the Gift Aid scheme were introduced.

Gift Aid Reclaims

There are now three options for making gift aid reclaims:

HMRC’s online service;
Third party or in-house software;
Paper form ChR1, which replaces the old R68(i).
These more automated processes undoubtedly enhance HMRC’s ability to interrogate the data provided in claims and to investigate irregularities. It is therefore more important than ever to maintain proper records. For all donations, a minimum of the donor’s initials and surname, house number and postcode should be recorded along with the date and value of the payment.

Small Donations Scheme

Eligible charities and community amateur sports clubs can now take advantage of top-up payments on small cash donations of £20 or less where it is difficult to collect a gift aid declaration. Stringent eligibility conditions restrict the scheme to those organisations with a good compliance history. Claims are capped at £5,000 per year and there are rules to prevent connected bodies claiming more than £5,000 between them. Every £10 of small donation claims must be matched by £1 of normal gift aid reclaims. This matching requirement and the lack of overall cap on normal gift aid reclaims should serve as incentive for charities to encourage donors to sign gift aid declarations whenever feasible.

Community Buildings

An additional ‘community building amount’ is available for small donations collected as part of charitable activities run in community buildings. These will typically be places of worship or town halls. The rules defining charitable activities and community buildings are detailed but are clearly designed to encompass things such as collections at regular church services, whilst excluding purely fundraising events. This additional relief is also subject to a cap of £5,000 per community building used by the charity.

Charity Shops

Charity shops are increasingly utilising arrangements that allow them to make gift aid reclaims on the value of donated goods sold. These arrangements typically involve shops selling goods as agents on behalf of donors who agree to donate the proceeds to the charity. Until recently, this required relatively sophisticated procedures to be able to trace and link sales to donors and invite them to donate the proceeds after sale.

The rules have now been relaxed to allow one-off gift aid declarations covering up to:

£100 of future sale proceeds from goods sold by a charity itself; or
£1,000 of future sale proceeds from good sold by a trading subsidiary.
Charities running their own shops may therefore wish to consider setting up a trading subsidiary.

Get up to speed now!

Although these developments are generally welcomed by the charitable sector, organisations need to familiarise themselves with the new rules quickly to ensure they maximise the benefit.

The media found a new target. This time it was people whose tax bills are reduced as a consequence of totally legitimate and laudable behaviour.

Let’s deal with “laudable” first. The country apparently approves of philanthropy. There is widespread support for charitable causes, from the arts to medical research, from help for the aged to charities for kids, good causes command respect.

The country also apparently approves of risk-takers establishing businesses that provide people with employment opportunities that might otherwise not exist.

Given these are perceived “good things”, governments of different hues have sought to create structures over the years to promote them. And because these good things involve individuals spending money, the structures have of necessity been money-related – which inevitably involves use of the tax system.

The Gift-Aid system is designed so that when a person gives money to charity, the charity can claim from the Treasury the basic rate tax deemed to relate to the donation. £10 donated becomes £12.50 to the charity. And a higher-rate tax payer is entitled to recover by way of tax relief the difference between his higher-rate, be it 40% or 50%, and the basic rate of 20% imputed into the donation. So a £400K charitable donation is worth £500K to the charity – and the donor gets a deduction for tax, if he’s a 50% tax payer, of £150K (50% – 20% times £500K).

Shock, horror! £150K tax saved! UK Uncut will have a field day!

But it’s cost him £400K to get it.

Don’t know about you, but personally, I’d rather not blow £400K simply to save myself £150K of tax. I’d grit my teeth, suffer the tax, and party on the net £250K I’d saved myself.

Similarly, the risk-taker might be making substantial losses in the business he’s set up. Horror of horrors!- he might get a tax break!

But the value of the tax break will only ever be a percentage of the losses that caused it.

The Chancellor now wants to cap unlimited tax reliefs at £50K or 25% of income, whichever is the higher.

Let’s look at an example. Let’s assume the person who gave £400K to charity had gross income of £1 million. Under the present regime, the charity gets £500K, a net £250K from the donor, and £250K from the Treasury.

Going forward, the individual can of course maintain his level of donation at £400K, but as his tax break will cease at £250K, he’ll more than likely cap his contribution at that level. In which case the charity will get £312.5K and the donor’s tax break will fall by £56,250. The charity will be £187,500 worse off, the Treasury £93,750 better off (£56,250 from the donor’s tax bill, £37,500 from the reduced top-up it pays the charity). The difference between the charity’s loss and the Treasury’s gain (£93,750) sits in the donor’s pocket.

Maybe he’ll give the extra away without a tax break – anything’s possible, however unlikely.

The same applies to establishing new businesses. The tax consequences of risk-taking are very much a part of the decision-making process as to whether or not to take the risk. Remove the tax break, you increase downside risk, making the risk-taker much more averse in the first place.

The media initially got this one completely wrong. Not surprising, given all it did is following the claptrap spouted by UK Uncut. And the Chancellor simply bought into this populist message, because frankly, it suited him – the less that goes to charities, the less business risks people take, the more tax revenues go to the Treasury. It’s just those “good things” that suffer.