Q: My client is looking to us, as his accountants, to come up with ways of legitimately reducing his tax bill without the risk of restriction or enquiry by HM Revenue & Customs at a later stage. One suggestion we have for him would be the utilisation of the Gift Aid scheme. However, not many of our clients have used this, so we are rusty on the basics of it.
A: Gift Aid is essentially a scheme whereby charities that have registered with HMRC are able to reclaim tax on donations made by UK taxpayers to the charity, and also benefits the taxpayer himself as it enables him to claim income tax relief. Community Amateur Sports Clubs (CASC) are also included in the scheme.
The scheme extends to companies as well as individuals, and as a result, companies that make donations to registered charities can obtain tax relief by deducting the donation from the profits charged to corporation tax within the corporation tax return.
Charities within the EU can also benefit from this provision, however charities outside the EU and taxpayers who make donations to non-EU charities are not afforded this relief.
The Gift Aid scheme is an alternative to payroll giving, which provides tax relief through the payroll in full at source.
For the taxpayer, as long as he has paid tax equal to the amount reclaimed by the charity for the year in question he is able to take advantage of the relief, while those clients who have no or insufficient tax liability will have a charge added back equal to the amount of relief given.
Any taxpayer who pays at the higher or additional rate will have the basic-rate band increased by the gross amount of gift aid to give relief at their marginal rate of tax reflected in their annual tax return. A donor who is a basic-rate taxpayer will receive no further tax relief as a result of making a donation.
Donations made under Gift Aid can be utilised in the previous tax year if the previous year’s tax return has not already been submitted, but it is not possible to amend a tax return to obtain relief where a donation has been made after submission of the tax return.
When you donate money to charity, the charity can give you a benefit. It could be a badge, a t-shirt, or a football, for example. In the case of larger donations the benefit might be a concert ticket, a dinner or an excursion out.
However, the value of any benefit is limited to the value of the donation on the following basis: for donations up to £100 – 25 per cent. For donations up to £1,000 – £25 maximum. For donations between £1,000 and £50,00 – 5 per cent.
