Mahmood Reza outlines the main rules of Gift Aid and related compliance issues, and explains how they apply in practice.
Tax aid
Charitable giving by the public is a major source of income for the voluntary sector, accounting for up to a third of total income. According to recent figures, charities received £472m from Gift Aid and this figure is likely to increase. With effect from 2003 and 2004 the Government will be introducing new incentives to encourage taxpayers to give to charity when they make their annual tax return and Gift Aid is being actively promoted by a number of organisations.
Gift Aid is a scheme through which charities can potentially reclaim from the Inland Revenue tax on individual donations received. At current rates this could amount to as much as 28% of the value of the donation. For example, if an individual makes a donation of £100, that donation could be worth £128 to the charity.
The Gift Aid rules were revised in the Finance Act 2000 and the Inland Revenue is increasing the number of audit reviews, channelling more resources into making sure that charities comply with the new regime. It is essential that charities understand the rules; failure to operate Gift Aid correctly will usually result in the charity repaying the tax, plus interest and penalties.
The three main areas that charities need to be aware of are:
? The Gift Aid declarations
? The audit trail
? Donor-benefit rules
The donor must have given the charity an appropriate declaration. This is a prime record that must be obtained and kept by the charity. Declarations can be either written (including email) or spoken (usually by telephone). All declarations must include the following information:
? Name of the charity
? Name and address of the donor
? A description of the donations to which the declaration relates
? A declaration that the donations are to be treated as Gift Aid donations.
The donor must have paid an amount of UK tax equivalent to what is being claimed by the charity. If this is not the case the charity will still be paid, but the Revenue will seek to recover the money from the donor.
The charity?s records must ensure that an audit trail can be followed, linking a donor with each of their donations; and that all the other rules and conditions relating to Gift Aid have been satisfied. It is imperative that charities have adequate and effective recording systems for cash donations, which will need to tie in with the cash and bank records - an area that the Revenue will examine carefully.
If the donor (or connected person) receives any benefit as a consequence of making the gift and it is not within stated limits (subject to an overall limit of £250 in a single tax year), then the donation is excluded from the Gift Aid regime. A benefit can be for goods or services provided directly by the charity or a third party, such as discounts on services or membership benefits. In some cases charities need to annualise any benefits provided.
The rules above benefit both the charity and the donor. The charity can claim tax back from any donations received, whether large or small, regular or one-off and the donor can claim tax relief on the donation(s) made. The donor will have to complete simpler Gift Aid declarations, which can be done in advance of any donation.
Mahmood Reza is Proprietor of the accountancy practice Pro Active Accounting.
t: 0116 224 7122; e: info@paa.uk.com His company has recently launched PC-based software to help organisations manage membership funds, donations, grants, donated goods and services and assets, including record keeping, statutory compliance and tax reclaims.