Charities should take note of two Gift Aid-related changes which will both come into effect in April this year.
New Gift Aid declaration wording
In October 2015, HMRC published new model Gift Aid declarations which reflect its updated guidance.
What has changed?
Donors are now warned that it is their responsibility to pay to HMRC any shortfall between the amount of tax (income or capital gains tax) they pay in the relevant tax year and the amount of Gift Aid a charity claims on their donations. So, if a donor has paid tax of £200 in a year but donates £1,000 and provides a Gift Aid declaration, the charity will receive £1,250. The Gift Aid scheme here will have increased the donation by £250, which exceeds the £200 the donor has paid in tax. There is therefore a shortfall of £50 which will need to be made good to HMRC.
Why has this changed?
The change follows on from research which found that donors seldom understand the link between the tax they pay and the amount of Gift Aid a charity can claim on their donations. Donors were making declarations even though they had not paid sufficient tax, which meant that instead of being cost neutral to the Treasury (with tax collected from a donor meeting the cost of paying out Gift Aid on his or her donations), the Treasury was, on a number of individual donors, making a net loss when paying out Gift Aid to charities.
What should you do differently?
Charities’ Gift Aid declarations must reflect the new approach from 6 April 2016 in printed materials, online and elsewhere (including declarations over the phone or face to face).
Using the exact model wording is not compulsory; charities are still able to design their own declarations, as long as they contain all the information required by HMRC.
Charities do not need to ask existing donors to provide new declarations if their existing declarations cover all future donations. It would be sufficient for a charity to update such donors on their responsibility to make up any shortfall between the tax they pay and the Gift Aid the charity claims, for example by way of a notice in a newsletter, provided you can demonstrate to HMRC that all donors have been given a proper explanation of the update (so keep relevant records).
However, despite the fact that new declarations for existing donors are not a requirement, you may wish to consider obtaining them anyway as a matter of best practice. That way, you can be sure that the donor is aware of the responsibility (he or she may not read the newsletter, for example), and help to avoid a situation of a shortfall in the first place.
What if a donor pays insufficient tax, in spite of the warning?
HMRC has clarified that, in practice, it may invite the relevant charity to make up the tax shortfall on the donor's behalf, but this is an entirely voluntary matter for the charity; it is not legally obliged to do so.
From a reputational perspective, a charity should consider two issues.
First, it would be sensible to make sure at the outset that all donors are fully informed about the implications of making a Gift Aid declaration, to minimise the number of instances where HMRC might seek recovery in respect of a shortfall in the first place. Charities should therefore begin reviewing their procedures for obtaining Gift Aid declarations if they have not already done so.
Secondly, charities might want to consider whether they ought to meet the shortfall, and whether changes to their governing documents may be needed to permit them to do so.
A request from HMRC to a donor for extra cash might spell unwanted press for the particular charity which has benefitted from the donation. Also relevant is that in meeting the shortfall, a charity will not be worse off than if no Gift Aid declaration had been provided. Taking the example above (the donation of £1,000 on which Gift Aid of £250 was claimed but in respect of which a £50 shortfall arose), the charity would repay £50 and overall retain £1,200, £200 more than if no Gift Aid declaration had been made. The alternative would require the donor to pay the shortfall (here, £50), meaning an additional cost to them which is unlikely to have been envisaged and may not, at the time that it arises, be affordable.
Update on the Gift Aid small donations scheme
From 6 April 2016, the amount on which qualifying charities and community amateur sports clubs (CASCs) can claim top-up payments under the Gift Aid Small Donation Scheme (Scheme) will increase from £5,000 to £8,000.
Recap on the Gift Aid Small Donation Scheme
In a nutshell, the Scheme permits qualifying charities and CASCs to claim top-up payments on small cash donations of up to £20 each in circumstances where it would be difficult to obtain Gift Aid declarations from the donors (eg a bucket collection).
Who can claim?
Charities and CASCs are able to claim under the Scheme, providing they meet the following conditions:
- They must make claims under the usual Gift Aid Scheme.
- They must have existed for at least the last two complete tax years (6 April to 5 April).
- They must have made a successful Gift Aid claim in at least two of the last four tax years.
- There must not be a gap of two or more years between those claims or since the last claim.
- They must not have incurred any penalties under the Gift Aid regime or the Scheme in the current or previous tax year.
What will you be able to claim following the increase?
Qualifying charities and CASCs will be able to claim top-up payments on up to £8,000 of small cash donations. There is a formula for calculating the amount of top-up payments. Essentially, for as long as the basic rate of income tax is 20%, top-up payments are calculated by dividing the total small cash donations by four. So, if a charity claims top-up payments up to the new limit of £8,000, it will receive a top-up of £2,000 under the Scheme.
The claim is subject to the "Gift Aid matching rule". To claim top-up payments under the Scheme, the charity must also have made a normal Gift Aid claim on other donations received in the same tax year. For every £1 of Gift Aid donations a charity claims, it can claim top-up payments under the Scheme on £10 of small cash donations. So to claim top-up payments on the full £8,000, a charity must also have made a Gift Aid claim on at least £800 of other donations in the same tax year.
Running charitable activities in a community building
A charity or CASC can claim increased top-up payments where they run charitable activities (rather than just fundraising activities) in a community building at least six times per year. A “community building” is essentially a building such as a village or town hall or a place of worship. To qualify for the increased top-up payments, the activities must involve a group of at least 10 of the charity's beneficiaries, rather than activities which cater to individuals separately such as one-on-one counselling or private prayer, and be open to the public.
Any charity which meets these conditions will be able to claim up to £8,000 for small cash donations received whilst charitable activities are carried out in the community building plus up to £8,000 for small cash donations from other sources, such as a bucket collection. So, if an animal welfare charity collected £4,000 in collection boxes around the town and received £2,500 of small donations during its monthly charitable activities held in a village hall, the charity could claim top-up payments on both collections.
Where a charity runs charitable activities from more than one community building, the maximum sum is for each community building in which the charitable activities are run.
The Government announced in its 2015 Autumn Statement that it will review the Scheme and an HMRC consultation made a call for evidence in December last year so we can expect further coverage over the coming year.
In the meantime, you should consider whether your charity may be eligible to make claims under the Scheme if you are not already doing so.