Gift Aid: Donors and charities beware

Pound coins
Donald Drysdale By Donald Drysdale for ICAS

27 October 2015

Donald Drysdale reviews the changing circumstances of Gift Aid.

The benefits of Gift Aid

How many times, on joining a membership organisation or simply entering a tourist attraction, have you been asked:  “Would you like to Gift Aid that amount?”

It seems almost too easy.  Apparently, at no cost to you, a UK charity can claim back a significant amount of tax simply because you’ve signed the form.

If you’re a UK taxpayer and have given your consent, a charity or community amateur sports club (CASC) can reclaim the basic rate tax on your donation.  If the sum you give is (say) £100, the charity grosses this up to £125 by reference to the 20% basic rate and reclaims the tax of £25 from HMRC.

And that’s not all.  If you pay income tax at 40% or 45%, you can reclaim the difference between the basic rate and your marginal rate through PAYE or self-assessment. Thus a 40% taxpayer giving £100 net can claim higher rate tax relief of £25 (that’s 20% of £125), while a 45% taxpayer donating the same sum can claim additional rate tax relief of £31.25 (25% of £125).  From 6 April 2016 onwards, rates of relief for Scottish taxpayers will be derived from the Scottish rate of income tax.

The downside of Gift Aid

Because Gift Aid is a tax relief, the donor must have paid enough income tax and/or capital gains tax in the year to cover the amount reclaimed.  To police this, HMRC must be able to trace the donor and connect them with the donation they’ve made.  For this reason donors under Gift Aid are required to sign a declaration.

Where a donor has paid insufficient tax to cover the basic rate tax reclaimed by the charity, HMRC will assess the donor and collect the shortfall.  For some this should ring alarm bells, and if they ignore the risks and go ahead under Gift Aid an unwanted tax liability may emerge later.

Examples of those for whom Gift Aid might be unsuitable could include:  a non-working spouse with no income making a donation from a joint account;  an individual receiving an inheritance or windfall and making a gift much greater than their income;  someone making a gift and then losing their job unexpectedly so that their annual income falls below the personal allowance;  or a generous donor with low income but significant wealth.

New guidance for charities

On 21 October 2015, following consultations that started in 2013, HMRC published amended guidance on Gift Aid.  The latest updates, including new model Gift Aid declarations, are on HMRC’s website and should be studied by all those responsible for UK charities and CASCs.

The Gift Aid rules seek to simplify the process of charitable giving, with an emphasis on the increasing variety of methods used for making donations.  A Gift Aid declaration can be given in writing (including by email, fax, or text message) or orally (in person or by telephone).  It may cover a single donation or multiple donations.  It must contain the donor’s initial, surname and home postal address (house number and postcode as a minimum).

As part of the process, the donor must confirm that they are a UK taxpayer and understand that, if they pay less tax in the current fiscal year than the amount of Gift Aid claimed on all their donations, it is their responsibility to pay the difference.

If a charity or CASC fails to comply with all the requirements of Gift Aid, they may have to repay tax that has been inappropriately reclaimed.

Conflicting concerns

HMRC’s model declarations help charities and CASCs by telling donors that Gift Aid can boost their donations by 25p for every £1 they donate.  Nonetheless, such organisations fear that donors may be discouraged from using Gift Aid because of the threat that they might have to make up any tax shortfall. However, the charities and CASCs themselves didn’t like an alternative government suggestion (which hasn’t been pursued) that shortfalls might have been reclaimed from them.

Corporate donors

Charitable donations by companies are commonly referred to as ‘corporate gift aid’, but no Gift Aid declaration is required and the charity can claim no tax repayment.  A company’s qualifying donations to charities and CASCs can generally be set against its profits for corporation tax purposes, but special rules apply to donations by a company to a charity or CASC that owns it.

Recent legal opinion sought by ICAEW suggests that a wholly owned subsidiary company should account for charitable donations to its parent charity or CASC as distributions under company law, meaning that those paid in excess of distributable profits would be unlawful.  HMRC guidance is currently awaited on the tax repercussions of such unlawful distributions, past or future.

Partnership donors

Where a charitable donation is made by individuals in general partnership, it is HMRC’s practice to accept that one of them may give a Gift Aid declaration if formally appointed to do so.  From 6 April 2016 each individual partner will need to make their own Gift Aid declaration in respect of their share of a partnership donation.

Other points

Finance Act 2015 allows for Treasury regulations (still awaited) to make it easier for donors to give to charity through intermediaries such as independent fund raisers.  The aim is to ease the administrative burden on intermediaries by relieving them of the need to receive a Gift Aid declaration for each individual charity a donor gives to through them, while also easing the process for donors giving to multiple charities through a single intermediary.

The Gift Aid Small Donations Scheme has applied since April 2013.  Subject to detailed conditions, it allows eligible charities and CASCs to claim ‘top-up’ payments (equivalent to Gift Aid tax repayments) on cash donations of £20 or less, without needing to know the identity of the donors or collect Gift Aid declarations.  Tax reclaimed under this scheme in a tax year can’t exceed £1,250, but from 2016/17 this limit will be £2,000.

Article supplied by Taxing Words Ltd.


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