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17 November 2004 / Mike Truman
Issue: 3984 / Categories:


Gordon's Gift Horse

MIKE TRUMAN asks whether an already improved set of charitable tax reliefs could be improved still further.


Gordon's Gift Horse

MIKE TRUMAN asks whether an already improved set of charitable tax reliefs could be improved still further.

DON'T LOOK A gift horse in the mouth, they say. It seems unfair to criticise the current tax reliefs for charitable donations when they have changed so much for the better in recent years. The scale of the change was highlighted last week by Sir Bob Geldof's account of the telephone call he took recently from Gordon Brown. The Chancellor was ringing to point out that the new Band Aid 20 single and the Live Aid DVD would generate £4 million of VAT and that he wanted to give this back to the charity. By contrast, twenty years ago the charity had a huge argument with the government over VAT on the original Band Aid single.

A quick read through the sections dealing with charitable gifts in Tolley's Income Tax (15.11 — 15.21) indicates how things have changed during the Labour Government. Millennium gift aid in 1998; gift in kind relief in 1998 and extended in 1999; the removal of the lower limit for gift aid and other changes in 2000; gifts of shares and securities or land and the removal of the payroll giving limit also in 2000; and now the opportunity to donate a tax repayment to charity — they have all contributed to a very different landscape for charity fund-raising. However, new rules have also brought some new problems.

A relief too far?

Allowing taxpayers to donate their tax repayments to charity was perhaps a relief too far. Mike Thexton's Finance Act 2004 notes, from which we have printed a couple of articles in Taxation over recent months, comment tersely but accurately that:

'As it is rather easier to make a charitable donation under gift aid than it is to file a tax return, most people will probably continue to regard the two things as separate exercises'.

There are several scenarios that can be envisaged where this relief might not work properly. The most obvious is that your money might go to the wrong charity.

Wrong charity

Question 19A on the tax return, which deals with donating tax repayments to a charity, does not ask for the name of the charity at all, simply the code number. The code numbers can be looked up on a search facility via the Revenue's website. Let's say that you are an old boy of Bradford Grammar School, expecting a £50 tax repayment, and you think it would be a nice idea to donate it to your alma mater. You look the code up on the website but take it down incorrectly. It is highly unlikely that the code you enter will be valid at all, and therefore the tax repayment will be sent to you with an explanation of what has happened.

But what if you take down the wrong code? If you enter Bradford Grammar School into the Inland Revenue's search facility you actually get three possibilities — the other two relating to the Girls Grammar School. If you mistakenly take down and enter the wrong code number, your repayment will be sent to the wrong charity.

Wrong amount

Let's assume that you do manage to enter the right code. You sit back in the comfortable knowledge that you have sent a small but worthwhile gift to your old school. You tick box 19A.5 to say that you would like your details passed on to the charity, so you are not surprised to get a letter from the school. You are, however, surprised when you open it and find it is thanking you for your extremely generous donation of £2,000. You had miscalculated your tax repayment, and have given rather more than you intended.

There is a way to guard against this, although it is not immediately apparent from the wording of the form. Rather than ticking box 19A.1 to say that you want all of the repayment to be made to the charity, complete box 19A.2 which says that you only want to give them part of the repayment. The entry has to be a figure — enter the maximum that you would want to give. So if you expect a repayment of £50 you might enter a figure of £75. If the repayment is less than that, it will all go to the charity; if it is more, the remainder will come to you.

No repayment

But it could be worse. You fill in the tax return showing an unexpected repayment of £600 which you decide to donate to charity, and send it off. The repayment is made to the charity, but later there is an enquiry into your affairs. You have made an innocent but significant mistake in completing it. Not only was there no repayment due, but you actually owed £400. As a result, the Revenue will demand £1,000 from you — the £600 paid to the charity and the £400 that was due. Admittedly the same situation would arise if you had waited until the repayment came through and then had written a cheque to the charity, but you could at least have chosen to wait until the following year to make the payment, and then related it back to this year.

Gift aid declarations

Another issue which it is worth paying some attention to is the global and unlimited nature of the standard gift aid declaration. A typical wording would be that 'gift aid should apply to all donations I have made since 6 April 2000, and all donations I make from the date of this declaration until I notify you otherwise'.

There is a general problem with such declarations and that is that people's circumstances change. The Inland Revenue's guide for charities suggests that people should be reminded regularly that they should cancel the declaration if they no longer pay enough tax, but when someone loses his job it is unlikely that the first thing on his mind will be the cancellation of his gift aid declarations.

Subtle traps

There are also some more subtle traps. Miss Marple is a regular member of the congregation at St Eutychus church in St Mary Mead, and was asked in 2000 to complete a gift aid declaration for her regular monthly standing order to church funds. As a pensioner, her income is not high, but she is paying just enough tax to cover the gift aid on her monthly payment.

In 2003-04 she has received a £10,000 legacy from a long-lost relative's will. The church is currently fund-raising for a new organ, and she decides to gift this windfall to them. She hands over a cheque for £10,000 without thinking about the tax. The treasurer, not knowing her circumstances, notes that she has completed a gift aid declaration in the past and therefore reclaims the tax.

Miss Marple completes her tax return for the year and enters the regular monthly amount as gift aided, but does not think to enter the £10,000, since she considered that to be a separate one-off gift. After an enquiry triggered by the audit of the church's tax reclaim, she receives a demand for the £2,820 tax refund that the church received which is not covered by her tax payments.


What should Miss Marple have done? Strangely, there appears to be (strictly speaking) no way that a single donation can be excluded from the gift aid scheme. The Donations to Charity by Individuals (Appropriate Declarations) Regulations 2000 (SI 2000 No 2074) only allows for the cancellation of the declaration, not for it to be disapplied for a particular transaction. It seems that Miss Marple should strictly have cancelled her declaration from the day that she made the payment and then reinstated it from the following day. The cancellation cannot, however, be retrospective; it takes effect at the earliest date that the charity receives notification. In practice, if the treasurer is told when the cheque is paid over not to claim gift aid on the single donation and does not claim it, there seems to be little likelihood of a problem, and it could be argued that this is in any case an oral declaration of a cancellation and subsequent reinstatement.

Deposited gifts

It might well be that Miss Marple could have covered the tax on the payment if she had spread the donation over four or five years, but the church needs the money for the organ now. The solution to this used to be fairly straightforward when tax relief was available for covenants. The lump sum would be lent to the charity on a 'deposited covenant' scheme, with the annual repayments being covenanted back to the charity as they arose. This was merely a book-keeping entry and no cash needed to change hands. Under gift aid, however, there must be a cash payment in order to claim relief. This can be achieved by an exchange of cheques, so the cheque to Miss Marple for the loan repayment would be matched by a cheque back from her to the church. But this is inevitably a more complex system to set up, and it is hard to see why the old deposited covenant rules could not be applied to gift aid. The same problem arises with expenses — volunteers who can legitimately claim for expenses they have incurred should be encouraged to claim them and then to donate the money back under gift aid, but there will need to be an exchange of cheques; it cannot simply be handled as a book-keeping exercise.


None of this should detract from the considerable improvements made in tax relief on donations to charities. It is unlikely that any charity would want to go back to the pre-1998 rules. However, there do still seem to be a number of minor but helpful changes that could be made without significantly risking tax revenue. Perhaps the Chancellor might want to consider them in a Pre-Budget Report that is appearing just a few weeks before Christmas …?


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Issue: 3984 / Categories:
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