The National Audit Office (NAO) has issued a report examining how HMRC monitors and evaluates the effectiveness of gift aid reliefs, and how it tries to deal with tax avoidance, fraud and error in relation to tax reliefs on donations. The NAO reports that it is estimated that, while use of these reliefs costs the Exchequer approximately £2 billion per year, around £170 million is also lost through abuse of these reliefs or simple error.
According to sources within the sector, the main impetus behind the report is to ensure that charities obtain as much value as legitimately possible from the use of these tax reliefs, while at the same time identifying areas in which HMRC can improve. Gift Aid is recognised, by both the NAO report and HMRC, as an extremely important source of income for charities, and as the report mentions it "is important that tax reliefs on donations are well administered to protect the reputation of the charitable sector and give confidence to donors".
Particular recommendations to HMRC in the NAO report include:
- Undertaking regular assessments of losses arising from Gift Aid and other donation reliefs, and evaluating ways to reduce these losses to the extent they arise from avoidance
- Improving the flow of information between HMRC's charities team (which administers reliefs arising to charities) and other parts of HMRC - in particular, those parts of HMRC dealing with tax reliefs for donors
- Working more closely with the Charity Commission and other charity sector regulators to identify and resolve potential problems with the tax affairs and proper running of charities
Perhaps the greatest challenge facing HMRC is tackling deliberate avoidance of the reliefs - it estimates that £110 million of the £170 million lost per year arises because of tax avoidance (in particular, HMRC has identified eight marketed avoidance schemes, which it is moving to shut down). The NAO report does much to stress that most of this avoidance relates to charities "generally unfamiliar to most people" and which "do not receive donations from the general public", but it will be important to ensure that any abuse of the system is monitored more closely and effectively by HMRC.