Gift Aid

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Gift Aid is a scheme to enable tax-effective giving by individuals to charities in the United Kingdom. The Gift Aid scheme was originally introduced in Finance Act 1990 for donation from 1 October 1990, but was originally limited to cash gifts of £600 or more. The scheme was substantially revised from 6 April 2000, when the minimum donation limit was abolished. A similar scheme applies to charitable donations by companies that are subject to UK corporation tax.

The details of the scheme are complicated, and this article only gives an outline of its basic features.

Gift Aid allows individuals who are subject to UK income tax, to complete a simple, short declaration that they are a UK taxpayer. Any cash donations that the taxpayer makes to the charity after making a declaration are treated as being made after deduction of income tax at the basic rate (22% in 2006/7), and the charity can reclaim the basic rate income tax paid on the gift from HMRC. For a basic-rate taxpayer, this adds approximately 28% to the value of any gift made under Gift Aid. Higher-rate taxpayers can claim income tax relief, above and beyond the amount claimed directly by the charities. The rate of the relief for higher-rate taxpayers in 2006/7 is usually 18%, the difference between the basic rate (22%) and the higher rate (40%) of income tax, although recipients of savings income (taxed at 20% and 40%) and dividend income (taxed at 10% and 32.5%) can achieve higher rates of tax relief (20% and 22.5%, respectively).

Originally, declarations had to be made in writing. Declarations can now be made verbally, but the charity must confirm the declaration in writing and keep a copy of the confirmation. If the taxpayer incorrectly makes a declaration, the charity is still able reclaim the tax that should have been paid on the gift, but the individual is required to pay the same amount to HMRC to make up the difference.

Gift Aid can only be reclaimed on money donated by UK taxpayers. Non-UK taxpayers can make donations but the donation will not be eligible for a tax reclaim from HMRC.

Contents

[edit] Gift Aid on Donated goods

Gift Aid was originally intended for cash donations only. Since 2006 however, HMRC rules have been changed to allow tax on the income earned by charity shops acting as agent for the donor to be reclaimed, although to operate effectively, the charity needs HMRC-approved systems to be able to record and track the progress of each item from receipt to sale, and confirm with the donor that the donation should still go ahead. [1]

[edit] A practical example

  • Mr X donates £100 to charity.

Mr X is a higher-rate taxpayer, paying 40% income tax on part of his income. He has made a Gift Aid declaration to the charity. As a result:

  • the £100.00 gift is treated as being made after deduction of basic rate tax at 22%(20% from 6 April 2008). The gross value of the gift before tax is £128.21 (£100.00 × 100/78)(from 6th April 2008 £125 but for three years a special supplement of £3.21 will be paid by HMRC), - this is the amount of money you would need to earn to receive £100.00 after tax.
  • the charity can claim the £28.21(£25 form 6th April 2008) of basic rate tax (£100.00 × 22/78) that the taxpayer is treated as having paid on the gift, effectively an extra 28%(25%) on top of the value of the £100.00 donation.
  • as a higher-rate taxpayer, Mr X can also claim back 18%(20% from 6th April 2008) of the gift, £23.08 (£100.00 × 18/78) (£25 from 6th April 2008), when he makes his tax return.

[edit] The benefits to the charity

Before 2008

£100 donation
£28.21 refund from HMRC
Total to charity = £128.21

For 2008-11

£100 donation
£25 refund from HMRC
£3.21 supplement from HMRC
Total to charity = £128.21

After 2011 (assuming there are no changes to the rules during the intervening 3 years)

£100 donation
£25 refund from HMRC
Total to charity = £125

[edit] The cost to the donor

Before 6th April 2008

£100 donation
less £23.08 refund from HMRC in due course
Total cost to Mr X = £76.92

After 6 April 2008

£100 donation
less £25 refund from HMRC in due course
Total cost to Mr X = £75

[edit] Revenue to HMRC

Not all monies paid to HMRC during this transaction are refunded, so when giving to a charity there is generally also a donation to The Treasury.

  • Any National Insurance contributions paid by the employer and employee are not refunded.
  • Although all income tax paid by the higher-rate taxpayer is refunded, the way this is implemented has the effect of making the donation smaller than the higher-rate taxpayer may have intended as the following example illustrates:
£128.21 total received by charity £128.21 gross income before taxes
less £28.21 the refund from HMRC to the charity less £51.29 higher rate (40%) imposed on giver
equals £100.00 paid to charity equals £76.92 net income received by giver
less £23.08 the refund from HMRC to the giver less £76.92 cost of donation to giver
equals £76.92 cost of donation to giver £0.00 difference kept by HMRC

The giver has only really donated £76.92 (£75 from 6th April 2008) of net income, despite having made a payment of £100.

  • If the charity does not reclaim the tax this money stays with The Treasury.
  • If the giver does not submit a self-assessment or forget to fill in the appropriate information on the self-assessment, the refund to the giver stays with The Treasury.

[edit] References

  1. ^ HMRC GA on Donated Goods
  • James Kessler QC & Setu Kamal, Taxation of Charities, 6th edition 2007, Key Haven Publications

[edit] External links

These sources give the Revenue's view, which is important but should not necessarily be taken as correct on all points.