GIFT AID SMALL DONATIONS SCHEME
The gift aid small donations scheme (GASDS) has, since 6 April 2013, enabled charities and community amateur sports clubs (CASCs) to claim a top-up payment, similar to gift aid, on small donations up to a specified limit, without the donor having to make a gift aid declaration or even to be a UK taxpayer. Following representations from charities and CASCs, the scheme has undergone significant changes since 2013. Despite this, eligible organisations are claiming far less than the £100 million per year anticipated by the government when the scheme started. In 2017/18, the amount claimed was only £30 million – which is not peanuts, but it could be more.
One of the most significant changes is that since 6 April 2016, the maximum amount of small donations on which a GASDS top-up payment can be claimed in a tax year is £8,000 rather than the original £5,000. With basic rate tax remaining 20%, the maximum top-up that can be claimed is £2,000 rather than the original £1,250.
From 6 April 2019, the maximum small donation on which a top-up can be claimed is increased from the original £20 to £30. But the total amount on which the top-up can be claimed remains £8,000.
From 6 April 2017, GASDS was simplified and made easier for smaller and newer organisations to claim. The rules requiring the charity to be recognised by HMRC or the CASC to be registered with HMRC for at least two full tax years, and to have successfully claimed ordinary gift aid in at least two of the previous four years, were removed. But the GASDS top-up is still capped at 10 times the amount of ordinary gift aid claimed in the tax year – so to claim the maximum £2,000 top-up on £8,000 GASDS donations, the organisation must claim at least £200 on £800 ordinary gift aid donations. This requirement limits GASDS participation for very small charities/CASCs which receive many small donations but few ordinary gift aid donations. An independent charity tax commission recommended in July this year that the government explore removing this cap [see Recommendations for gift aid reform, below].
Also from 6 April 2017, GASDS covers not only cash donations, but also donations made by contactless payment (by card, mobile phone or other device with the donor present). But it still does not include donations made by text message, cheque, debit/credit card or bank transfer. This is because GASDS is not intended to be a substitute for gift aid, and charities/CASCs would be expected to obtain gift aid declarations for donations made by these methods.
Most other rules in relation to small donations remain unchanged. In particular the full amount of a small donation has to be used for charitable purposes, and cannot be a membership fee. If the charity's/CASC's managers do not know whether the gift is £20 or less, it is eligible for the scheme only if they have taken reasonable steps to find out. The donation must be made in the UK, and if in cash must be deposited in a bank account or other allowed account in the UK. The donor, if known, must not have made a gift aid declaration that would cover the donation, such as a permanent (enduring) declaration that continues until the donor cancels it. The donation must not be made under the payroll deduction scheme, or be tax deductible for the donor, or be subject to repayment, or be connected with any arrangement under which the charity will acquire property from the donor or a person connected with the donor. And finally, there must be no benefits associated with the gift, or any benefits associated with the gift must be of negligible value (for example, a lapel sticker designed to acknowledge the donation, or coffee and a cake for a person making a donation at a coffee morning).
The GASDS rules on connected charities also remain unchanged. In general, if two or more charities/CASCs are connected with one another in a tax year and their purposes and activities are the same or substantially similar, the £8,000 on which a top-up payment can be claimed is divided by the number of connected charities making top-up claims for that year. The definition of connected charity is quite wide and could include two substantially similar charities/CASCs which each have the same person as one of their trustees – so if two or more charities or CASCs could be connected it is essential to read HMRC's GASDS guidance [see Resources, below]. The rules on connected charities apply differently if any of the connected charities run charitable activities in a community building during the tax year.
The rule that GASDS claims can only be made for two tax years after the year in which the donation was received still remains.
From 6 April 2017, revised GASDS rules apply to charities (but not community amateur sports clubs) that run primary purpose charitable activities in a community building on at least six occasions during the tax year, each involving at least 10 beneficiaries taking part in the activity, and do not charge a fee to enter the building or part of the building where the charitable activities take place. For each community building to which this applies, a charity can claim top-up on small donations, to a maximum of £8,000, made at the community building and/or in the same local authority area as the building. Alternatively, instead of making a separate GASDS claim for each community building, each potentially up to the maximum, the charity can choose to make a single GASDS claim on small donations to a maximum of £8,000 received anywhere in the UK. For a charity with only one eligible community building, a claim covering donations made anywhere in the UK may be more advantageous than a claim only on donations made at the community building or in the same local authority area.
"Community building" means a building such as a village hall, community centre, town hall, place of worship etc, or those parts of it, to which the public or a section of the public have access at some or all times. It does not include any parts of a building used wholly or mainly for residential purposes or the supply of goods. It also does not include any parts of a building that are used wholly or mainly for other commercial purposes, unless a charity is carrying out a charitable activity in those parts, and the parts are available for use exclusively by the charity in carrying out the activity.
The community building rules are explained in HMRC's GASDS guidance [see below], as are the rules where two or more charities/CASCs are connected in a tax year and at least one of the connected charities (but not a CASC) runs charitable activities in a community building.
Legislation: Small Charitable Donations Act 2012; Small Charitable Donations Regulations 2013; Small Charitable Donations Act (Amendment) Order 2015; Small Charitable Donations and Childcare Payments Act 2017; Small Charitable Donations Act (Amendment) Order 2019. Search "Small charitable donations" at www.legislation.gov.uk.
Claim top-up payments for the gift aid Small donations scheme. HMRC basic guidance: https://tinyurl.com/gn3nnsp.
The gift aid small donations scheme from 6 April 2017. Chapter 8 in HMRC's detailed guidance notes for charities on how the tax system operates: https://tinyurl.com/y6derm25.
Gift aid resources listed in Legal Update 1916.
AVOIDING GIFT AID ERRORS
In March 2019, the Charity Tax Group coordinated a meeting between HMRC officials and charities to discuss issues relating to gift aid. CTG subsequently issued notes from the meeting, along with HMRC's list of common errors on gift aid claims and frequent questions to its charities helpline. Among the many issues covered are donor addresses, sponsorship declarations with multiple names in the same handwriting, and what gift aid can and can't be claimed on. Anyone who administers gift aid should read these notes.
Important clarifications from HMRC on gift aid and data. Charity Tax Group, 28 May 2019: http://tinyurl.com/y356vdfg.
Gift aid: HMRC feedback on common errors and frequent questions to the charities helpline. Charity Tax Group, 28 May 2019: https://tinyurl.com/yy5ao98w.
GIFT AID PAYMENTS FROM A CHARITY'S TRADING SUBSIDIARY
Two changes in accounting practice have affected corporate gift aid payments from a charity's trading subsidiary to its parent charity.
Payments from distributable profit vs taxable profit
The first change arose from guidance issued by ICAEW (Institute of Chartered Accountants in England and Wales) in October 2014. This said that even though HMRC considers a gift aid payment from the trading subsidiary to its parent charity a donation for tax purposes, under the law governing company accounts it is a distribution (i.e. similar to a dividend) rather than an expenditure. The amount available for distribution is called distributable profit, and is also known as accounting profit. Distributions can be made only from this distributable profit, which may be lower than taxable profit.
Trading subsidiaries have generally based gift aid payments to their parent charity on their taxable profit. The ICAEW guidance means that if a subsidiary donates more than its distributable profit, the payment of the additional amount is unlawful and the charity is liable to repay the excess, with the subsidiary having to pay tax on that excess.
The Charity Commission, HMRC and ICAEW issued revised guidance in February 2016 for trading subsidiaries whose practice was to make donations greater than their taxable profits. Sayer Vincent accountants said at the time, "It has always been the case that the most tax efficient way to operate subsidiaries was to keep the taxable profit the same as the accounting profit, so that the subsidiary could donate all the profits and so pay not corporation tax. Only larger charities with complex tax affairs have to consider how they plan their activities and may incur some level of tax charge, but that is already the case." Any charities and trading subsidiaries affected by this change should have been advised by their accountant or auditor before or at the time of the 2016 guidance.
How payments made after the end of the financial year are shown
The second change arose from gift aid payments to a parent charity now being defined as distributions [see above] rather than expenditure. Accounting rules say that distributions have to be shown in the subsidiary's accounts for the accounting year in which the payments are actually made, which may be the accounting year in which the profit is earned or a later year.
Many trading subsidiaries do not make their gift aid payments until after the end of the accounting year. This gives the subsidiary time to calculate its profit for the year, and know exactly how much is available to be distributed/donated to its parent charity. Under tax rules – which are different from accounting rules – a trading subsidiary's gift aid payments made in the nine months after the end of the accounting year can be carried back as deductions for that year. They can be deducted from the subsidiary's taxable profit for that year, even though the payments were not actually made during the year.
New accounting rules in effect for accounting periods starting on or after 1 January 2019 do not affect this tax treatment, but may affect presentation in the accounts. Changes to Financial Reporting Standard 102 (FRS 102) and FRED 68 say that gift aid payments that have not actually been made by the end of the year can be shown in the subsidiary's accounts for that year, but only if the subsidiary is legally bound to make the donation, with a deed of covenant or similar legal agreement in place between the subsidiary and charity. If no such legal agreement is in place, any post-period payments must be shown in the next year's accounts.
A deed of covenant harkens back to the olden days, prior to April 2000 when gift aid rules were completely revised. Back then, individual and corporate gift aid tax reliefs were available only if the donor had a deed of covenant with the charity. After April 2000. charities could claim tax on donations made by individual taxpayers under either a deed of covenant or a gift aid declaration, and corporate donors (including charity trading subsidiaries) could get tax relief on donations without having any agreement in place.
Under the new rules for accounting years starting on or after 1 January 2019, trading subsidiaries which make gift aid payments after the end of an accounting period but want tax relief on them during the first period, will have to have a deed of covenant or other legally binding agreement in place. Without such agreement, post-period gift aid payments will have to be shown in the next year's accounts, when the payments are actually made. Trading subsidiaries and their parent charities should take advice from their accountant or auditor on how post-period gift aid payments should be shown.
Sayer Vincent's Gift aid payments from subsidiaries [see below] explains the changes, and also explains why a charity's trustees may decide not to put a deed of covenant in place.
Resources for charities and their trading subsidiaries
Using a trading company. Sections 45-50 in annex iv of HMRC's detailed guidance notes for charities on how the tax system operates: https://tinyurl.com/y3cnfqes.
"Charities with trading subsidiaries", section 4 in Trustees trading and tax: How charities may lawfully trade. Charity Commission CC35: http://tinyurl.com/gm9u9v8.
Subsidiaries. Made Simple guide, Sayer Vincent accountants: https://tinyurl.com/y3u257dt.
Gift aid payments from subsidiaries. Sayer Vincent accountants, February 2018: https://technology-trust-news.org/G8B-5ELX7-ISQ8WZ-2ZNHNV-1/c.aspx.
RECOMMENDATIONS FOR GIFT AID REFORM
The independent Charity Tax Commission, set up by the National Council for Voluntary Organisations in 2017 and chaired by a former chairman of Inland Revenue (later HMRC), published its recommendations on gift aid, payroll giving, charity VAT and business rates relief on 17 July. Gift aid proposals for the government were:
- To reform gift aid. Unless donors opt out, the value of additional and higher rate tax reliefs (which reflect the 45% and 40% current tax bands) should be directed to charities rather than to the donor. This would be on top of the current 25% basic rate relief which the charity can already claim. Even if donations from these higher rate taxpayers stay stable, charities could receive at least an additional £250 million per year.
- To launch a universal gift aid database, which would provide a single, enduring declaration which individuals can make covering all their subsequent gifts to charities.
- To promote awareness of gift aid and eligibility criteria, for example by HMRC including information about gift aid when corresponding with both taxpayers and non-taxpayers.
- To consult on the practicalities of text donations and gift aid declarations, and look at how emerging technologies can make gift aid administration easier and more efficient.
- To explore removing the requirement that gift aid small donations scheme claims cannot be more than 10 times the gift aid claimed in that tax year [see GASDS, above].
- To review corporate gift aid and examine how to maximise the benefit to charities.
- To carry out more research into gift aid so it benefits more types of charities.
The report and recommendations are at https://www.ncvo.org.uk/tax.
source sandy adirondack 1917 06.08.19