Charitable giving by the public and companies is a major source of income for the charitable and voluntary sector, with an estimated 56% of people in the UK making regular (monthly) donations.

The UK tax system provides financial benefits to donors and the charity concerned; we will outline the main ways that tax and charitable giving interact, and how donors and charities can benefit. Pro Active Resolutions has specialist knowledge and experience in helping not for profit clients get the most out of the donations people give.

Gift Aid

Gift Aid is a scheme where registered charities (or Community Amateur Sports Associations, CASCs) can potentially reclaim from the Inland Revenue tax on donations received from individuals (not companies). The Gift Aid scheme is administered and managed by HM Revenue & Customs (HMRC) Charities Unit at Liverpool.

At current rates the claim could be as much as 28% of the value of the donation (up to 5th April 2011). For example, if an individual makes a donation of (say) £100 that donation could be worth £128 to the charity.

Under the Gift Aid scheme a registered charity can claim the tax back on the gross equivalent value of the donation, the tax reclaim being based on the basic rate of income tax, which is currently 20%. In practical terms this means that a £100 cash donation has a gross value of £125, for every £100 donated the charity can claim from HMRC an extra £25 (£125 × 20%).

Gift Aid and the donor
Where the donor is a higher rate taxpayer, paying income tax at 40% or 50%, they can financially benefit from tax relief as they can claim back the difference between the basic rate of income tax and the higher tax rates of 40% or 50%. For example if a higher rate tax payer paying tax at 40% donated £100 following would apply

Charity: The gross donation would be £125, £100 cash received and £25 tax reclaim;

Donor: They could claim back from HMRC £25, i.e. 20% of £125, the 20% being the difference between the basic rate and the taxpayers higher rate.

There is a requirement that the donor must have paid an amount of UK tax equivalent to what is being claimed by the charity, if this is not the case the charity will still be paid, the Revenue will seek to recover the money from the taxpayer.

Qualifying donations and conditions:

Gift Aid applies equally irrespective of the manner in which the qualifying donation is given (in person, by phone, by internet, through the payroll) or the form of money (physical cash, cheques, standing orders, direct debits, debit or credit cards).

Donor provided benefits:
Donations will not qualify for Gift Aid if the value of benefits provided exceeds certain limits. There are two limits that apply to the value of the benefits that a donor, or a person connected with the donor, may receive in return for making a donation. These are worked out using the 'relevant value' test and the 'aggregate value' test:

Relevant Value Test:
Where donations are made after 6th April 2007 the maximum value of a benefit for a particular amount of donation are set out below
Amount of donation Benefit value limit
£0 to 100 25% of the donation
£101 to £1,000 £25
£1,001 to £10,000 5% of the donation
Above £10,000 £500 maximum

Aggregate Value Test:
In addition to the relevant value test above, the benefits must also pass the aggregate value test. This says that the value of benefits received by the same donor in one tax year as a result of making more than one donation to the same charity in that tax year must not exceed £500 for donations made on or after 6 April 2007. The Finance Bill 2011 includes a measure to increase the upper limit of £500 to £2,500. If the proposal is enacted the new limit will apply with effect from 6 April 2011.

If the value of the benefits received exceeds either of these limits, the donation will not qualify for Gift Aid

Benefits: meaning:
A benefit is:

• any item or service
• provided by the charity or a third party
• to the donor or a person connected with the donor
• in consequence of making of the donation.

If goods or services are provided for the donor by an unconnected third party entirely unsolicited by either the charity or the donor, such goods or services will not be considered to be benefits for the purposes of these rules.

Valuing donor benefits:
The general rule for valuing benefits is that it is based on the (market) value to the donor, not the actual costs to the charity. Where the item or service, or a comparable item or service, is sold to the public (whether by the charity or someone else) on arm's length terms (for example, a ticket to attend a performance by a charitable opera society), the value of the benefit will generally be the sale price to the public.

Where the value of the benefit is less immediately obvious, the charity will need to determine how much someone dealing with it at arm's length would be prepared to pay for the benefit. Evidence might be obtained from similar transactions in the commercial sector.

Excluded benefits:
Benefits that can be provided and not invalidate any Gift Aid claim will include a simple acknowledgement of the donation; literature describing the work of your charity such as newsletters; the right of admission to view charity property if it is granted in return for a donation of at least 10 per cent more than the admission charge; events/dinners where there is no significant element of additional fundraising involved

Gift Aid Claims

To claim Gift Aid the charity needs to
Register with HMRC by completing the relevant application form, CHA1;
Nominate someone in the charity to be an authorised official or nominee to claim and receive money on behalf of the charity.

GIFT AID RECORDS AND PAPERWORK

The donor must have given the charity an appropriate declaration, it is a prime record that must be obtained and kept by the charity. Declarations can be given in written form (including e-mail) or orally (usually by telephone). All declarations must include the following information:

• Name of the charity
• Name and address of the donor
• A description of the donations to which the declaration relates
• A declaration that the donations are to be treated as Gift Aid donations.

The audit trail has to make sure that the charity's records can show:

1. An audit trail linking the donor with each of their donations;
2. All the other rules and conditions have been satisfied

It is imperative that charities have adequate and effective recording systems for cash donations; this will need to tie in with the cash and bank records and will be an area that Revenue will examine carefully.

If you'd like more information simply call today for a FREE consultation to discuss your organisation's needs on 0116 2247122