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What is Gift Aid?
Gift Aid is a way of charities or Community Amateur Sports Clubs (CASCs) to claim tax back for donations made to them by UK taxpayers.
A CASC is a sports club which has applied either to the Charity Commission for charitable status entitling it to the same tax treatment as that available for charities, or to HM Revenue & Customs for the tax reliefs available specifically for these sports clubs. These reliefs for sports clubs were introduced by the Chancellor of the Exchequer on 17 April 2002 in his Budget.
To be eligible for Gift Aid, a charity or CASC must register with HM Revenue & Customs.
How it works – the basics
When a gift/donation is made to a charity it can then claim back the basic rate tax on the gross equivalent. This means that as of 6 April 2008, charities can claim back 20 percent meaning that for each £1 donated, an additional 25 pence can be reclaimed.
Furthermore, between 6 April 2008 and 5 April 2011 a further transitional relief is available to adjust to the fall in basic rate tax meaning that HMRC pay a further three pence for every pound donated. This means that for every pound donated, your charity could be reclaiming an additional 28 pence.
The gift must take the form of a “payment of a sum of money” not subject to a condition as to repayment made by a UK resident when the gift is made. Writing off a debt, for instance, cannot qualify as a Gift Aid payment.
The rules in relation to benefits in return for a donation have been relaxed so that individuals, sole traders or partnerships making a donation may be entitled to small benefits which must not exceed set limits without jeopardising the Gift Aid entitlement.
Tax effective donations
There are numerous ways that donations can attract the benefits of Gift Aid.
For instance, from the individual’s point of view, apart from the obvious moral benefits of giving to charity, there are also added benefits for higher rate tax payers who can claim back the difference between the higher rate of tax (currently 40%) and the basic rate of tax (currently 20%). Individuals are often unaware of this and this is something worth pointing out to potential donors.
Furthermore, where someone wishes to gift an asset to a charity it is often better for tax purposes to sell the asset and gift aid the proceeds.
Charities often overlook this area, particularly when it comes to selling donated goods such as clothes, books, old toys etc. Such sales do not normally attract Gift Aid. However, a way to ensure that any such sales do retain this tax benefit is to offer to sell any goods for individuals as an agent in the hope that they will then donate the proceeds of sale, thus qualifying for Gift Aid. This is better known as Retail Gift Aid.
But beware…
There are strict rules to ensure that any eventual donation by the individual from the sale of their own goods qualifies for Gift Aid. These are that:
- The goods remain the property of the owner until they are sold. It must be clear that it’s the owner who is selling the goods and not your charity or CASC – you’re just acting as an agent on their behalf.
- The owner must have the right to keep all or part of the proceeds of the sale but can choose to donate all or part of the proceeds if they wish.
- Your charity or CASC must contact the potential donor after the goods are sold and offer to pay them the proceeds from the sale of their goods.
- The donor must make a Gift Aid declaration for any donations made. Please click here for more details.
Admissions to Charity Property
A further example of the strict rules which often catch charities out without them even realising it relates to admission prices to view charity property. Property is defined by HM Revenue & Customs as including:
- land or buildings
- artefacts
- works of art (but not performances)
- plants
- animals
- scientific property (please click here for more details)
The admission payment must count as a voluntary gift to qualify for Gift Aid. A voluntary gift is one which is either 10% more than the normal admission fee or allows admission for at least 12 months.
Examples
- Andrew visits a horse sanctuary and pays £10 for admission. As this is the standard admission fee for the sanctuary, the payment does not qualify for Gift Aid.
- Barbara visits the same horse sanctuary and pays £11 (10% more than Andrew). Her ticket entitles her to the same right of admission. Her payment, therefore, qualifies for Gift Aid.
- Chris, being a keen equestrian, opts for a 12 month membership to visit the horse sanctuary as often as he wants within that time. His payment also qualifies for Gift Aid.
In points 2 and 3 above there are further conditions which must be met:
- The donations must be supported by a Gift Aid declaration
- Visitors must be offered a clear choice about whether they make a donation or pay the normal admission price for entry to view a property
- The donor’s right of entry to view the charity property is identical to that of someone paying the normal admission price
- All other Gift Aid conditions are met
This is clearly an area in which charities may not be meeting the strict conditions set by HM Revenue & Customs and your charity may need to address this to ensure full compliance to the Gift Aid rules.
Further guidance is available on the HM Revenue & Customs website.
Donations by Companies
Companies, similarly to higher rate tax paying individuals, can claim tax relief on donations to charities, again, provided they meet certain rules.
Of these, the most notable ones are:
1. The payment must be a ‘qualifying donation’. Simply put, this is a payment of a sum of money which is not a distribution of profit nor one which:
a. is subject to a condition, for instance repayment;
b. has a benefit which exceeds the ‘relevant value’;
c. is conditional upon the charity acquiring property from the company,
unless this is a gift; or,
unless this is a gift; or,
d. is made by a charity.
2. The donations cannot be used to create or exacerbate trading losses.
3. Companies partly owned by Charities can only make donations to charities if these payments are not classed as share distributions.
Whilst there appear to be many ‘hoops’ to jump through, the benefits to a Company that already donates to charity, or which plans to donate, are obvious; these donations can be set off against taxable profits.
Charities can also gain the benefits of Company donations by setting up wholly owned subsidiary companies. The companies can then carry out trading activities which would normally fall outside of the tax exemptions available to the charity.
These companies can then enter into a Gift Aid arrangement with the ‘parent charity’ to pay a sum of money equating to any amount of their taxable profits. This is often known as ‘profit shedding’ and can be a very effective tool for charities who carry out trading activities.
Furthermore, the rules were amended so that from 1 April 2006 companies owned by two or more charities can ‘profit shed’.
There are further rules which govern this and other Gift Aid schemes which is why it often pays to seek professional advice.
Further information
For further information please speak to one of our specialists in the Charities team who will be able to advise you based on your own individual circumstances and requirements.
