The Gift Aid Question

14/03/2012

How the Gift Aid Question arose
The simple answer is: Rob and I went on a holiday for the weekend, to Harrogate.

Harrogate is a beautiful spa town, with a fascinating historical enthusiasm for all things curative, especially (at the start of the 20th century) the curative power of electricity. For any illness you might care to name.

There was actually a ‘treatment’ which would involve the patient lying in a wooden bath full of peat, which would then be electrified. Who on earth wakes up one day and thinks, “Well, a peat bath is good – very soothing. But it’s missing something… perhaps a live current?” Thank goodness that doesn’t happen any more. After all, we need to preserve our peat bogs.

Anyway, the countryside around Harrogate is very different to that around my home in Willingham, containing many strange natural features which are simply not to be found in the Fens. Mostly, hills. For those of you from the north Cambridge area, if you can, imagine something like the cycle bridge across the A14 from next to the St John’s Innovation Centre to Milton, but huge, and with stones and grass tussocks to trip you up instead of the miniature sleeping policemen on the pedestrian side of the bridge.

To witness more of these strange things, we struck out on foot, and stumbled upon a number of local and national conservation charities operating in the area. This meant that, in a relatively short period, I was exposed repeatedly not only to hills (my legs are still complaining now) but also to the Gift Aid Question. You know the one – it goes “So, that’s two tickets for two adults… Now, would you like to Gift Aid that?”

My experiences over the weekend have brought me to an unpleasant conclusion. I have been labouring under a misapprehension that normal people, not just charity law specialists, know what Gift Aid is. In fact, it turns out that there are not only people out there who not only do not know what it is, but there seem to be a number of reasonably large charities with staff or volunteers who cannot explain how it works when asked.

At this stage, given Rob’s comments about my approach to solving this problem over the weekend, I would like formally to apologise to all the charity staff and volunteers, and visitors in front or behind us in queues, who may have been confused or annoyed by a talkative, surprisingly knowledgable visitor, inexplicably keen to share her understanding of the mechanics of Gift Aid.

As Rob pointed out, he has grown used to a steady flow of charity related news and information from me. Others are unlikely to be. Therefore: I am sorry for any confusion caused. I shall try to restrain myself in the future.

Although, actually, I’m pretty sure that my helpful information persuaded at least one man to Gift Aid his entrance fee when he wouldn’t have done so otherwise. Or, I suppose Rob might suggest, he may just have agreed to stop me from talking to him about it. But, in any case, the charity got its Gift Aid.

A quick guide to Gift Aid
If a donor to a charity has paid or will pay the right amount of income or capital gains tax in the UK in the tax year in which a donation is made, and makes an appropriate Gift Aid declaration, the charity can reclaim the income tax on the ‘gross’ equivalent of the donation (i.e. its value before income tax was deducted at the basic rate) from HM Revenue & Customs (HMRC).

As a simplified example, let’s say that one of my friends, Julie, is paid £25,000 each year for her work as an administrative assistant. After her personal allowance is taken into account (presently £6,475), she will pay income tax at the basic rate of 20% on her remaining pay. This will amount to £3,705 of income tax on £18,525 of pay. Her ‘net’ pay will be £14,820.

Julie decides that she would like to make a donation of £20 to Jimmy’s Night Shelter. Julie is asked whether she would like her donation to be subject to Gift Aid, and, being familiar with the concept (as she has a friend who cannot stop going on about such things), she agrees to this. She knows that she will have paid income tax on at least £25 this tax year. In fact, she will be paying income tax on a gross amount of £18,525 of her pay, so more than enough to cover the Gift Aid on this donation and all her other donations to charity this tax year.

The charity takes her details, and applies to HMRC to reclaim the income tax which Julie paid previously on her £20. HMRC repay the sum of £5 to the charity (25p for each pound donated). As a result of Julie agreeing to Gift Aid her donation, the value of Julie’s gift to the charity has been increased by a quarter, to £25, at no cost to Julie.

This is why Gift Aid is great. The only person who ‘loses out’ in any way is HMRC. And it actively promotes the scheme, so we shouldn’t feel too bad on its account.

I should mention that if Julie had been a higher rate payer of income tax, at present, the situation would be even better from her perspective. The charity would still get to reclaim the basic rate of income tax paid by Julie on the amount given, but Julie should also get to reclaim from HMRC the difference between the basic rate and higher rate of income tax paid for herself. Anyone whose financial affairs involve higher rate income tax and gifts to charity should talk to their tax advisor about this.

Recent changes – charities beware!
On 24 February 2012, without fanfare, HMRC changed some of its online guidance on Gift Aid. The two key changes are:

1. The phrasing of the donor declaration.
Donors have previously had to declare that they had or would pay an amount of income tax and/or capital gains tax in the tax year of the donation at least equal to the amount of tax which would be reclaimed by the charity to which the ‘Gift Aid-ed’ donation was being made.

Now, the amount of income tax and/or capital gains tax must at least equal the amount of tax to be reclaimed by all charities to which they make ‘Gift Aid-ed’ donations that tax year. The new model declaration for a single donation can be found here, and the model declaration for a specific donation and all past qualifying donations / future donations can be found here. Charities should update their declarations as soon as possible.

2. The retention of Gift Aid records by a charity.
The time that a charity must retain its Gift Aid records has increased in the new guidance, from 4 years to 6 years. Charities will have to adjust their record-keeping arrangements accordingly.

I don’t know how many charities regularly check HMRC’s online guidance. However, I suspect they are few in number. Charities which are unaware of the changes may be in for an unpleasant surprise come their next Gift Aid audit. If you’re involved in a charity, make sure the person in charge of Gift Aid knows about the changes. If your charity produces its own Gift Aid forms, there’s a new checklist of the information which must be included in your version of the declaration. You can find this here

How should the Gift Aid Question be asked?
My experiences with charities near Harrogate suggest the need for those ‘on the door’ to have a better understanding of Gift Aid, or to be better trained to explain how it works.

Charities who are revising their declarations and checking their record retention complies with the new guidance may want to revisit the issue of training at the same time. Perhaps they could provide a flow chart to those tasked with asking the Gift Aid Question at the entrance. If we assume the entrance fee is £7, off the top of my head, it could go something like this:

1. We participate in the Gift Aid Scheme, which means you can increase your donation by a quarter at no cost to you personally. Would you like to know more about this? If yes, go to 2. If no, go to 7.
2. Will you pay income tax and / or capital gains tax in the UK this tax year? If yes, go to 3. If no, go to 6.
3. The value of your gift to the charity today is £8.75, if you are able to take part in the Gift Aid scheme, rather than £7. Will you pay income tax on an amount at least equal to £8.75 and the value of all other donations you have made or will make to charity this tax year? If yes, go to 4. If no, go to 6.
4. Would you like us to be able to reclaim 25p from HMRC for each pound you donate today, increasing the size of your donation by a quarter at no cost to you? If yes, go to 5. If no, go to 7.
5. Would you please read and complete this Gift Aid declaration for your donation today? Go to 7.
6. Unfortunately, you are not eligible to take part in the scheme. Go to 7.
7. Thank you for your time.

Question 3 will be the tricky one. I can’t help but wonder how many individuals will be able to keep track of the amount they give to charity in any tax year. However, presumably the fact that most people only give a small amount to charity (compared to their earnings on which they pay income tax) will give people the confidence to answer ‘yes’ to this question.

So, I think that such a series of questions should do the trick for most people, but any comments or suggestions as to how it could be simplified or improved are welcomed.

Update
Good news from HMRC – charities have until 31 December this year to update their Gift Aid declarations, and donors who have completed the old form enduring declarations will not have to complete new declarations.

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Gift aid on political donations

15/03/2011

Following my first blog, a friend mentioned that he had heard that gifts to political parties might obtain the benefit of gift aid. He was clearly not too impressed with this idea.

How Gift Aid works
Gift Aid works as follows: a person gives a cash donation to a charity and at the same time makes a Gift Aid Declaration, and, provided he or she has paid sufficient income tax, the charity is able to reclaim the basic rate tax on the gift from HM Revenue & Customs.

At present, this means that a gift of £100 to a charity with Gift Aid is worth £128 to the charity, although, with the end of transitional relief on 5 April, its value to the charity will soon decrease to £125.

If the donor is a higher rate tax payer, the donor is able to reclaim the difference between the basic rate and higher rate tax for him or herself. This can be a considerable incentive to higher rate tax payers to make charitable donations.

Gifts to charity also benefit from an Inheritance Tax exemption, and, where the gift consists of assets other than cash, a Capital Gains Tax exemption may also be available.

Reliefs for gifts to political parties
Although gifts to political parties already benefit from an Inheritance Tax exemption, provided the party which receives the gift has at least two members elected to the Commons or at least one member elected to the Commons and at least 150,000 votes at the last election, there is no Gift Aid available for cash donations to political parties.

This is because, while a charity can carry out campaigning and political activity provided it is in furtherance of its (non-political) charitable objects, a charity cannot have purely political objects.

In February, the co-Chairman of the Conservative Party, Lord Feldman of Elstree suggested to the Committee on Standards in Public Life that this situation should be changed. It is not the first time the suggestion has been made. At the time of the Hayden Phillips Report on party political funding in 2007, Labour was in favour of gift aid being available on political donations.

More recently, in 2009, the Liberal Democrat Lord Goodhart proposed an amendment to the Political Parties and Elections Bill which would allow a political party to reclaim up to £500 of basic rate tax on any donation by a tax payer.

Then, the proposed amendment was rejected, on the grounds that there was no public appetite for tax relief to be available on political donations, especially when politicians were held in such low esteem. It was noted that charities are viewed as deserving of special treatment by the general public, and political parties are not.

So, is the time now right for change?
I haven’t noticed any significant shift in public opinion, and my friend’s immediate response suggests that my perception may not be completely erroneous.

One of the arguments for making Gift Aid available on political donations put forward by Lord Feldman was that it would ‘decontaminate’ the issue of donations to political parties, and potentially increase the donor base for the parties. I think he is confused on this issue.

Simply giving political parties some of the same benefits that charities receive will not revive the fortunes of the political parties, in terms of their finances or their reputations. Charities have had to work hard for many years to achieve the public’s trust and confidence.

Given the current level of public trust in political parties, I can’t even begin to guess how long it might take for the political parties to achieve the same feat.

And don’t even get me started on the potential incongruity of charities being barred from engaging in any party political activity, and political parties receiving reliefs presently reserved for charities…