Charity Tax Relief : Tsunami
Tax Relief for Cash Gifts to Charity
In light of the recent appeals for the Tsunami disaster relief fund, Linda Eales of Qdos Consulting has summarised the systems of tax relief for cash gifts by individuals and companies to charity.
GIFTS FROM INDIVIDUALS
The two systems of tax relief for cash gifts by individuals are, Gift Aid ‘qualifying donations’ and the Payroll Deduction Scheme known as ‘give as you earn’. A third system, Deeds of Covenant, was abolished from 6 April 2000.
The Payroll Deduction Scheme
This scheme allows an employee to make gifts to their chosen charity before the deduction of tax, the sums being deducted by the employer from their salary and paid over to the charity agencies (see: http://www.inlandrevenue.gov.uk/payrollgiving/employers/orgsub1.htm on the IR website for a list of agencies) with full tax relief for the contributions made. Please note NIC is still deductible. For more information on this scheme you can call the IR on 0845 302 0203, for an Employer’s Information Pack visit the Payroll Giving pages on their website:
http://www.inlandrevenue.gov.uk/pdfs/emp2001/EmpeesLeaflet.pdf or call the IR Charities on the above number. Until 6 April 2004 the relief was boosted by a 10% supplement paid by the state. What a shame that this is not still in place!
Gift Aid
The law is in Finance Act (FA) 1990, s 25, accompanied by a helpful alloy of practice and concession in the Revenue Guidance Notes. There is no red tape at the time of the gift, just payment by cheque, cash or credit card to the charity. A declaration must be completed, but that can be done at any time and amounts to no more than a claim procedure. There is no minimum amount, though charities will decide for themselves whether or not to reclaim tax on very small gifts.
Gifts from a Joint Account
The Revenue Guidance Notes provide that the charity may, as a rule, accept that the gift is from the person who has made the Gift Aid declaration (even if the cheque is signed by the other account holder). Strictly, if both signatories sign the cheque it is normally a gift by both and Gift Aid declarations are accordingly required from both. If only one person signs, however, the gift is normally from that signatory alone.
Non-resident Individuals
The Gift Aid scheme applies with minor modification to non-resident individuals with income source from the UK.
How Gift Aid Works
The donor gives a cash sum. The charity is treated for tax purposes as if it had received the sum grossed up at the basic rate, from which tax was deducted at the basic rate. For example, on a gift of £100, the charity is treated as receiving £128 (from which £28 tax has been deducted). The charity receives the £100 and can reclaim £28 from the Revenue. The donor receives higher rate relief on £128. This is done by the technique of increasing the basic rate limit. The higher rate relief can be set against income or capital gains. From 2004/05 an individual completing a self-assessment return can direct that tax repayments due to him be paid to charities on a Revenue list. Any charity may apply to join this list see FA 2004, s 83.
The Maximum Payment
There is no statutory limit to the amounts that can be given by Gift Aid, however, there is a practical limit which arises because there can be no carry-forward of the relief.
Suppose, for example that an individual, who has no income, or gains, wishes to make a donation of £100 to a charity. If he/she pays £100 to the charity and makes a Gift Aid declaration, he/she then faces an unexpected tax charge of £28 (FA 1990, s 25(6)(8)). So an individual must take care to ensure that he/she does not make gifts to charity in excess of his/her taxable income and gains. In deciding whether a gift exceeds an individual’s income and gains, it must be remembered that the gift is grossed up hence the maximum gift for an individual with income and chargeable gains of £80,000 is £62,400.
The amount of an individual’s income may be retrospectively reduced if claims are made to carry back reliefs such as loss relief. In making such claims, care must be taken not to reduce an individual’s income and gains below the amount of any gifts made under Gift Aid, grossed up at the basic rate.
An individual’s higher rate relief can be carried back one year (FA 2002, s 98). An election cannot be made to carry back part of a gift, but two separate gifts can be made and an election made to carry back one of them.
Avoiding the Limit
An individual may wish to make a single cash gift that exceeds the amount of his taxable income and gains in that year. He/she should then consider a ‘deposited donation’, under which he/she:
(a) Makes a gift of an amount within his/her taxable income and gains, and
(b) Makes a loan of the balance, to be followed by similar gifts in later years until the loan is satisfied.
It will also be advantageous to spread Gift Aid relief in this way so as to arrange that the relief is used only against a donor’s income and gains that are taxed at the higher rate, and is not lost to obtain relief only at the basic or lower rate.
In fact, this scheme allows Gift Aid relief to be carried forward, something for which statute makes no direct provision. It would be particularly helpful if tax rates were to rise in the future. On the other side of the coin the donor is taking the risk that tax rates may fall, or that Gift Aid relief may be restricted.
The scheme is an alternative of the ceased Deposited Covenant Scheme, but it is not without problems. Two technical problems arise. First, the release of a loan is arguably not a payment of money. There must therefore be an exchange of cheques in the second year; if the donor simply agrees to waive the loan, the Revenue take the view that no tax relief will be available (FA 1990, s 25(2)(a)). Second, the affiliation of the loan and the gift arguably contravenes FA 1990, s 25(2)(f) (though this cannot have been Parliament’s true aim). It is not known if the Revenue take this point, but it would be advisable to seek advance clearance from the Revenue before operating this kind of arrangement.
GIFTS FROM COMPANIES
Companies qualify for corporation tax relief on cash gifts to charity. The relief is similar, but not identical, to the relief for individuals.
Relief is given by making the payment a charge on the company’s income (ICTA 1988, ss 338, 339). The gift is deductible for corporation tax purposes. No claim or declaration is needed but evidence of payment is required. There is no tax paid by the company and reclaimed by the charity.
Consideration must be given to whether company law permits the company to make the proposed charitable gift.
Linda Eales
leales@qdosconsulting.com
Jan 05