Tax efficient giving in COVID-19 times
By Philip McNeill, Head of Taxation (Tax Practice and Owner Managed Business Taxes)
9 December 2020
Christmas is known as a time for giving, and as we come towards the end of an extraordinary year Philip McNeill reflects on giving in a tax context.
It has been a truly unusual year, and 2021 promises a continuation of the trend. What does this mean for giving and for charities?
A sector under stress
While the pandemic has affected everyone, the financial impact has been varied. Online retailing has boomed and home delivery of craft beers surged, while other sectors languish. The charity sector is one of those most negatively impacted, with third sector organisations reporting that one in ten charities could close within a year.
What options are available to maximise support to this valuable sector, and what tax traps do we need to watch out for?
Re-writing the rules
In normal years, Gift Aid springs to mind as a mean of leveraging support to charities – potentially adding a quarter to each gift, and for higher and additional rate taxpayers, making the gift less expensive, so potentially encouraging additional generosity.
But this year, many businesses have been hit by trading losses, so the received wisdom needs to be re-evaluated. And while reforms to Gift Aid are in view, action by individuals now could maximise the benefits of the current system and avoid any pitfalls.
Traps and opportunities
Signing a Gift Aid declaration is something many people will do without a second thought. But in these surprising times care is needed.
Looking first at the traps. When anyone making a gift signs a Gift Aid declaration, s424 Income Tax Act 2007 (ITA 2007) kicks in to make them liable for any shortfall between the tax reclaimed by the charity on the gift, and the income tax and capital gains tax paid by that individual in that tax year.
If, due to COVID-19 related business losses, an individual were, exceptionally, not to be a taxpayer in the 2020-21 tax year, then the bill for any tax reclaimed by charities on gifts they make during the year would fall on them personally. An unwelcome burden in an already difficult year.
Fortunately, this might not be the end of the story. s426 ITA 2007 provides that, subject to conditions, a gift made in one tax year may be treated as made in the previous tax year. So, in these circumstances, the taxpayer could elect for gifts made in 2020-21 to be treated as if made in 2019-20. As 2019-20 was largely unaffected by COVID-19, it is likely that there would be sufficient tax in charge to cover the donations.
Before making any such election, it is essential to know the detail of the rules. In particular, the amount of the gift, and the amount of the election should match. And, for relating back to 2019-20, the election must be made in the 2020-21 tax return (or before it is submitted), as an election cannot be made or modified once the tax return for the year has gone in. See the cautionary tale £215,000 tax bill for being generous for the details.
Explaining the maths
All accountants love figures, but the public may be less enamoured. There is a role here in explaining an oddity of the rules, particularly to higher and additional rate taxpayers.
To keep the administration of Gift Aid relatively simple, gifts are treated as paid net of basic rate tax. Simply put, this means a gift of £80 to a charity under Gift Aid, comes with a £20 tax credit. The charity ends up with £100 (after making a bulk reclaim from HMRC on all Gift Aid donations). The giver pays £80 to the charity and £20 to HMRC in income tax on £100 of their earnings, and the job is done. The giver is treated as giving away £100 of their taxable income.
But what if the giver is a higher or additional rate taxpayer, or in Scotland, an intermediate rate taxpayer? Here, oddly enough, an additional refund accrues to the giver, not to the charity.
For example, a 40% taxpayer making an £80 gift is treated as giving away £100 of their taxable income. The money flow then becomes £80 gift to the charity, with £20 in tax for the charity to reclaim. But as the taxpayer has paid £40 in tax on their £100 earnings, which now belongs to the charity, this would leave HMRC £20 up on the deal. So, the additional £20 in tax is repaid to the taxpayer.
This means that it cost the 40% taxpayer, only £60 in order to give the charity £100.
While there have been suggestions that Gift Aid could be amended to allow higher rate taxpayers to direct the refund to the charity (eg page 26 Gift Aid donor research), while the current system remains, why not encourage higher rate taxpayers to claim the tax refund and increase their donation? There is evidence that many higher rate taxpayers don’t actually claim the tax refund, so this might be a year to start.
Gifts other than money
Gifts of quoted shares or land and buildings to charity also attract tax relief for the giver. This could be particularly attractive where there would otherwise be substantial amounts of capital gains tax due on sale of the asset. This relief is available to companies as well as to individuals.
Given the possible size of such items it is useful to note that the limit on income tax reliefs (of £50,000 or 25% of adjusted total income) does not apply here.
The cultural gifts scheme might be another attractive proposition in COVID-19 times for anyone with a ‘pre-eminent’ valuable asset and an unwelcome tax bill. Museums and other organisations could benefit as culturally significant objects may be directed to a museum of choice.
Gifts from businesses
Businesses can obtain tax relief on gifts to charity and community amateur sports clubs (CASCs). But again, care is needed. The rules for companies differ from those for unincorporated businesses. Particular care is needed around donation of services by companies, as these are unlikely of themselves to attract tax relief. Alternative routes such as secondment of employees, gifts of cash, equipment or trading stock may be more tax efficient. In all this, don’t forget the VAT.
Gifts of time
While gifts of money will always be welcome, giving your time can make life changing impact. The time of accountants and tax advisers can be valuable to charities. Here are a group of charities close to home that would welcome support.
The ICAS Foundation aims to support academically talented young people from disadvantaged communities who wish to go to university. It helps them overcome financial barriers which would otherwise deter them from studying accountancy or a finance related degree.
Beyond money, the charity also relies on volunteer mentors to support students or school pupils who want to go to university to study accountancy or finance.
Also in this year of crisis, The Scottish Chartered Accountants Benevolent Association will be in the forefront supporting CAs and their families through the pandemic. Sometimes having a fellow member with whom to discuss problems is a welcome option.
Beyond ICAS, though retaining strong links to accountancy and tax, there are the Low Incomes Tax Reform Group, TaxAid and Tax Help For Older People.
The Low Incomes Tax Reform Group (LITRG). LITRG is a part of the Chartered Institute of Taxation (CIOT) and exists to target help and information towards those in the community least able to afford to pay for tax advice.
TaxAid provides a professional, free, ‘crisis advice service’ to low-income taxpayers across the range of employment and self-employment tax problems that can’t easily be resolved with HMRC. It has a particular expertise in the area of tax debt.
Tax Help for Older People provides free, independent and expert help and advice for people aged over 60 on annual incomes below £20,000 who cannot afford to pay for professional tax advice. With some 420 volunteers and a national call centre, it provides caring and friendly help and advice on personal tax issues through its own expert advisers, in a way that is independent, confidential and individual to users’ needs. The charity welcomes donations and is always looking for more volunteer tax advisers across the UK.
Conclusion
The world may be very different this year but giving is as important as ever. In a changing world, it is time to reassess what we can do, and how we can do it better.