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Why consider Gift Aid?

The most common way for Individuals and Companies to make donations to a Charity is by means of Gift Aid.

How does Gift Aid work and how it can benefit both the Individual/the Company and the Charity?

In summary

Gift Aid is an easy way to help charities get extra money from your donations. A Gift Aid donation is treated as if basic rate income tax has already been deducted by the donor. Charities and community amateur sports clubs (HMRC uses the term Charities & CASCs) can then reclaim that tax from HMRC.

To make a Gift Aid donation:

  • An individual must pay at least as much income tax (and/or capital gains tax) as the amount of tax reclaimed by the charity. This is currently 25p for every pound of net donation.
  • It is essential for anyone making Gift Aid donations to understand how the process works to make sure both the charity concerned and the individual donor benefit fully from the charitable giving.
  • How Gift Aid works
  • The Gift Aid scheme is for gifts of money or other assets (see below) by individuals who pay UK tax. Gift Aid donations are regarded as having basic rate tax deducted by the donor. Charities take an individual's donation, the "net" amount, which is money they've already paid tax on, and reclaim the basic rate tax from HMRC on its "gross" equivalent which is the amount before basic rate tax was deducted.
  • Basic rate tax is 20% (2012/13), so this means that on a net gift of £10 using Gift Aid, it's worth £12.50 to the charity; e.g. it can reclaim £2.50 to add to the £10 net gift.
  • It's important to note that a qualifying charitable donation under Gift Aid doesn't have to have its source in "natural income". The source of the cash donated could be capital. The donation doesn't have to be in the form of cash; it can be for example:
  • Donations of goods etc. to charity shops for them to sell can, in many instances, be covered by a Gift Aid declaration. The charity will write to you each tax year to confirm the monetary value it has realised from the donation it has received
  • Land or buildings in the UK
  • Qualifying shares (those listed on any stock exchange)
  • As a result of selling assets to a charity at less than their market value. In such a case the value of the donation would be the difference between the sale value and the market value.
  • Where assets that have been donated to a charity are chargeable assets for the purposes of capital gains tax any gains made on the disposal are not chargeable.
  • A Gift Aid declaration must include
  • In order to make a Gift Aid donation an individual will need to make a Gift Aid declaration. The charity will normally ask a donor to complete a simple form; one form can cover every gift made to the same charity for whatever period chosen. This means a single one-off declaration can be in respect of any combination of one or more of the following:
  • Gifts made prior to the date of the declaration
  • The gift made at the time of the declaration
  • All gifts made in the future, until the declaration is revoked by the donor.
  • The Gift Aid declaration must, as a minimum, include the following details:
  • The donor's full name
  • The donor's home address
  • The name of the charity
  • Details of the donation, and it should be stated that it's a Gift Aid donation
  • The period of time that the declaration is in respect of.

It is possible to make a joint Gift Aid donation, provided the charity is informed of the split between the two donors. Each donor must complete the necessary Gift Aid declaration.

Personal Tax Relief

An individual must have paid sufficient income tax and/or capital gains tax for the tax year concerned (a tax year runs from 6 April to the following 5 April) to at least cover the amount of basic rate tax any charities will reclaim on donations made by the individual for that tax year. This will include any donation carried back from the following tax year - see later.

It is not only income tax deducted from earnings or pensions that can be used for Gift Aid purposes. It can also include:

  • Tax deducted at source from savings interest
  • Income tax paid on untaxed income via self-assessment
  • Tax credits on UK dividends
  • Capital gains tax on chargeable gains

Other taxes, such as VAT and Council Tax, do not qualify; neither do any non-UK taxes.

Higher and Additional Rate Tax Relief

More and more people are becoming subject to the higher and additional rates of income tax. It is important to understand how higher and additional rate tax relief is secured for these individuals.
Basically, the difference between the higher rate of tax (40%) and/or the additional rate of tax (50%) and the basic rate of tax (20%) i.e. 20% or 30% can be reclaimed by the donor on the total "gross" value of Gift Aid donations they have made in a year.

For example, for the 2012/13 tax year, if an individual donates£100 this will mean that:

  • The charity will receive the £100.00 from the individual plus a further £25.00 tax refund they reclaim direct from HMRC, making a total of £125.00 received by the charity.
  • A higher (40%) rate taxpayer can reclaim a further £25.00 (£125.00 x 20%) from HMRC meaning they will pay £25.00 less higher rate tax. This reduces the "cost" of the gift they have made from£100.00 they physically donated to £75.00 as they will pay less tax at the higher rate than would otherwise have been the case.
  • An additional (50%) rate taxpayer can reclaim a further £37.50 (£125.00 x 30%) meaning they will pay £37.50 less additional rate tax. This reduces the "cost" of the gift they have made from£100.00 they physically donated to £62.50 as they will pay less tax at the additional rate than would otherwise have been the case.
  • The reclaim is made the individual donor via their annual self-assessment tax return.
  • Carry Back Relief
  • Gift Aid donations can be treated as being paid in the previous tax year so long as the taxpayer paid enough tax that year to cover any Gift Aid donations made in that year plus the ones that are to be backdated.
  • A request to carry back the donation must be made before the earliest of:
  • The actual date of submitting the self-assessment tax return for the previous tax year
  • The filing deadline for the self-assessment tax return (31 October for filing a paper tax return, or 31 January for filing online)
  • If no self-assessment return was issued the deadline is 31 January after the end of the tax year into which the Gift Aid donation is to be carried back. This is done using a form P810.
  • The carry back of a Gift Aid donation has no impact upon the tax reclaimed by the charity concerned.

Why an individual might wish to carry back a charitable donation

There are a number of reasons why an individual might wish to elect to carry back a Gift Aid donation made in one tax year so that it is treated for tax purposes as having been paid in the previous tax year. This can be a complex area of planning. However, some reasons for electing to carry back a Gift Aid donation to a previous tax year could include:

  • Ensuring that sufficient tax has been paid to "cover" a desired level of donation
  • Allowing an individual to reclaim higher levels of personal tax, if they paid a higher rate of income tax in the previous tax year than they are likely to in the current tax year

There are of course many other reasons why this might be appropriate for an individual.

Effect of a Gift Aid Donation on Personal Allowances and On Tax Credit Claims

For the majority of individuals, it is important to let HMRC know about any Gift Aid donations made in a tax year. HMRC will subtract the amount of grossed-up donations when calculating an individual's total income for tax (and also benefit) purposes.

It is this reduced income figure that is used when looking at certain income related allowances and benefits, such as:

  • The personal allowance, which is reduced for individuals with income in excess of £100,000
  • The age-related personal allowance, which is reduced for individuals aged 65 and over with income in excess of £25,400
  • Child Benefit, which is being reduced on a sliding scale, with effect from 7 January 2013, where one parent has income in excess of £50,000
  • Tax Credits and Pensions Credit, which are means-tested benefits
  • Local authority benefits, such as Housing Benefit and Council Tax benefit
  • Many individuals, by not recording and reporting their Gift Aid donation, will end up either paying more tax than they are obliged to or claim less benefits than they are entitled to, or both.
  • For example, an individual with children who has an income of £51,000 making a gift of £800 to charity in a year (that's a little over £15 a week) would potentially benefit from a Gift Aid donation because of:
  • being able to reclaim £200 of higher rate income tax and
  • not suffering the 10% reduction in their Child Benefit payment (for two qualifying children the 10% reduction would equate to over £175)

So the actual cost to this individual of making a donation that would benefit the charity to the tune of £1,000 would be somewhere in the region of £425. However, if they didn't ensure that HMRC was aware of the donation, they could be missing out on over £375 in needless tax or unclaimed benefits.

As HMRC's records are not sufficiently robust to automatically tie up Gift Aid donations it is imperative that they are notified by the individual donors. On the subject of notifying HMRC it is important to accurately record Gift Aid donations. Remember, when taking a family to visit many attractions in the UK the individual paying will be asked to sign if they are a UK taxpayer - that is a Gift Aid donation. Annual membership of organisations, such as English Heritage or the National Trust, can also be Gift Aided. These facts are all important when it comes to ensuring the correct level of tax is paid and/or benefits claimed.

Records & Informing HMRC

For the reasons already explained, individuals must keep records of their donations to charities.

For every tax year, they should keep the following records:

  • details of Gift Aid donations showing the date, the amount and the charities involved
  • legal documents showing the sale or transfer of assets to charity; including share transfer documents or certificates or land transfer documents
  • any documentation from a charity asking an individual to sell land or shares on its behalf
  • As explained in the previous section, it is important to let HMRC know about Gift Aid donations where the individual donor:
  • has a level of income that will be sufficiently reduced as a result of the Gift Aid donations to qualify for higher personal allowances or be eligible for increased means-tested benefits
  • is a higher rate or an additional rate taxpayer
  • wishes to carry back a Gift Aid donation from one tax year to the previous tax year

HMRC would normally expect to be notified via the completion of the annual self-assessment tax return or in cases where one is not issued a Form P810.

Companies and Gift Aid

Companies (and unincorporated associations) can also claim tax relief for qualifying donations paid to charities. Generally, relief for Gift Aid donations is available in the accounting period during which the donation is made, but there are special rules for companies wholly owned by charities.

Gift Aid donations made to charities by companies are paid gross and so, unlike the individual Gift Aid scheme, no tax is repayable to charities. For the charity the donation is treated as potentially taxable income, but is exempt from tax provided the donation is applied for charitable purposes.

Charities receiving Gift Aid donations from companies should keep sufficient accounting records of such donations received, so that they can identify these in their accounts and tax return.

When a company makes a qualifying donation to a charity, the amount paid can be set against profits for corporation tax purposes. The company can make a claim in its corporation tax self-assessment (CTSA) return to set the amount of the donation against its taxable profits, to the extent that it reduces the chargeable profit to nil.

Charitable donations cannot be used to create or add to a company's trading losses, nor can excess charitable donations be carried forward or back although they may be surrendered as group relief.
The donor company should keep normal accounting records to support entries on its CTSA return along with any other relevant documentation, for example correspondence with the charity in relation to the donation such as a 'thank you' letter.

Gift Aid relief for donations made by a company can only apply to a payment which is a "qualifying charitable donation". A qualifying charitable donation is a donation to a charity consisting of a payment of a sum of money, subject to the restrictions outlined below.

A payment is not a qualifying donation if:

  • It is a dividend or distribution of profits
  • It is made subject to a condition as to repayment
  • The company or a connected person receives a benefit which exceeds the "relevant value" in relation to the payment
  • It is conditional on or part of an arrangement involving the charity acquiring property (other than as a gift) from the company or a connected person.

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