Gift Aid

Gift Aid is a UK tax incentive that enables tax-effective giving by individuals to charities in the United Kingdom. Gift Aid was introduced in the Finance Act 1990 for donations given after 1 October 1990, but was originally limited to cash gifts of £600 or more. This threshold was successively reduced in April 2000 when the policy was substantially revised and the minimum donation limit removed entirely. A similar policy applies to charitable donations by companies that are subject to the UK corporation tax.

Gift Aid was originally intended for cash donations only. However since 2006, HMRC compliant systems have been introduced to allow tax on the income earned by charity shops, acting as an agent for a donor, to be reclaimed. In order for the charity to operate effectively they will need 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] In the financial year 2014/5, Gift Aid to charities amounted to £1.19bn.^[2]

The Finance Act 2010 extended Gift Aid to charities within EU member states, Norway and Iceland, rather than those just inside the UK.^[3] Gift Aid was extended to include Liechtenstein in 2014.

Details

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 (20% in 2011), and the charity can reclaim the basic rate income tax paid on the gift from HMRC. For a basic-rate taxpayer, this adds approximately 25% 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 2011 is usually 20%, the difference between the basic rate (20%) and the higher rate (40%) of income tax, although recipients of dividend income (taxed at 10% and 32.5%) can achieve a higher rate of tax relief (22.5%).

Originally, declarations had to be made in writing. Declarations can now be made orally, 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 to reclaim the tax that should have been paid on the gift.

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.

The first charity to introduce Gift Aid on donated goods – where the tax is reclaimed on the value of the goods when sold – was Sue Ryder Care.^[4]

A practical example

Mr Burns donates £100 to charity.

Mr Burns 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 20%. The gross value of the gift before tax is £125 (£100 / (100%-20%)) – this is the amount of money a basic rate taxpayer would need to earn to receive £100.00 after tax.
the charity can claim the 20% of basic rate tax (£125 × 20% = £25) that the taxpayer is treated as having paid on the gross value of the gift. This is effectively an extra 25% on top of the value of the £100.00 donation.
because he is a higher-rate taxpayer, Mr Burns can claim back the remaining 20% of income tax which he has paid on the gross value of the gift (the 40% income tax which he paid, less the 20% claimed by the charity). He would make this claim in his tax return. This amounts to a repayment of £25 on the £100 donation (£125 × (40% - 20%)).

The benefits to the charity

For 2008-11 (when the basic rate of income tax was higher than 20%)

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

After 2011

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

The cost to the donor of the donation

Since 6 April 2008 (higher rate taxpayers only)

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

This means that for a net donation of £75 from Mr Burns, the charity would receive a benefit of £125.

If Mr Burns paid income tax at the additional rate (45%), the cost to him would be further reduced. He would be entitled to reclaim the remaining 25% of income tax which he paid on the gross value of the gift (the 45% income tax which he paid, less the 20% claimed by the charity). This would amount to a repayment of £31.25 on the £100 donation (£125 × (45% - 20%)). This would mean that for a net donation of £68.75 from Mr Burns, the charity would receive a benefit of £125.

The cost of the donation to a basic rate taxpayer is unaffected, as a basic rate taxpayer cannot reclaim any additional tax.

Revenue to HMRC

Not all monies paid to HMRC during this transaction are refunded.

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 cost of the donation smaller than the higher-rate taxpayer may have intended as the following example illustrates:

	£125.00	total received by charity		£125.00	gross income before taxes
less	£25.00	the refund from HMRC to the charity	less	£50.00	higher rate (40%) imposed on giver
equals	£100.00	paid to charity	equals	£75.00	net income received by giver
less	£25.00	the refund from HMRC to the giver	less	£75.00	cost of donation to giver
equals	£75.00	cost of donation to giver		£0.00	difference kept by HMRC

The giver has only really donated £75 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 properly completed self-assessment, the refund to the giver stays with The Treasury.

Notes

↑ "Selling goods on behalf of individuals". HM Revenue and Customs. 2014-12-08. Retrieved 2015-04-16.
↑ Total Gift Aid received by charities rose by £140m last year
↑ "The charities' guide to the Finance Act 2010". Sift Media. Retrieved 1 May 2015.
↑ "Sue Ryder Care reclaims £1million extra from the tax man". Sue Ryder Care. 28 August 2007. Archived from the original on 3 November 2009. Retrieved 2009-04-23.

References

James Kessler QC and Oliver Marre, Taxation of Charities and Non-Profit Organisations, 10th edition 2015, Key Haven Publications, accessible http://www.taxationofcharities.co.uk

External links

United Kingdom legislation
Pre-Parliamentary legislation	List of English statutes Charter of Liberties Magna Carta
Acts of Parliament by states preceding the Kingdom of Great Britain	Acts of the Parliament of England to 1483 1485–1601 1603–1641 Interregnum (1642–1660) 1660–1699 1700–1706 Acts of the Parliament of Scotland
Acts of Parliament of the Kingdom of Great Britain	1707–1719 1720–1739 1740–1759 1760–1779 1780–1800
Acts of the Parliament of Ireland	to 1700 1701–1800
Acts of Parliament of the United Kingdom of Great Britain and Ireland and the United Kingdom of Great Britain and Northern Ireland	1801–1819 1820–1839 1840–1859 1860–1879 1880–1899 1900–1919 1920–1939 1940–1959 1960–1979 1980–1999 2000 to date Halsbury's Statutes Legislation.gov.uk Short titles
Church of England measures	List Church of England Assembly (Powers) Act 1919
Legislation of devolved institutions	Acts of the Scottish Parliament List Acts and Measures of the National Assembly for Wales List Acts of the Northern Ireland Assembly Acts of the Parliament of Northern Ireland Orders in Council for Northern Ireland
Orders-in-Council	Order in Council
Secondary legislation	United Kingdom Statutory Instruments Scottish Statutory Instruments Acts of Sederunt Acts of Adjournal
Legislation relating to the European Union	1972 to date

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