Big relief - the Gift Aid scheme

Friday, 01 October 2010
Gift Aid is available to a registered charity where an individual UK taxpayer makes a donation with a declaration that allows the charity to reclaim the basic rate income tax that that the individual paid to HM Revenue & Customs (HMRC).

Since its introduction in Finance Act 1990, the Gift Aid scheme is estimated to have enabled charities to claim an estimated GBP4.57 billion by way of relief on donations.1 The idea behind Gift Aid is quite simple, but some circumstances may give rise to particular issues. The relief was extended in the 2010 budget to cover charities based in other EU countries, a major step in facilitating cross-border giving in the region.

Gift Aid is available to a registered charity where an individual UK taxpayer makes a donation with a declaration that allows the charity to reclaim the basic rate income tax that that the individual paid to HM Revenue & Customs (HMRC). Although the declaration can be made orally, it would be best to make it in writing, on the form that the charity provides.


If an individual donates GBP800 to a charity, the gross donation works out at GBP1,000 (the GBP800 gift, plus basic rate tax that the charity can reclaim of GBP200). A higher rate tax payer can claim relief of GBP300 (GBP1,000 x 30 per cent (i.e., 50 per cent less the 20 per cent already claimed by the charity)). The gift of GBP800 has therefore only cost the donor GBP500 but has allowed the charity to benefit by GBP1,000.

There is also an additional small sum due by way of transitional relief (in this example it comes to GBP25.64) which is available on gifts made between 6 April 2010 and 5 April 2011.2

Alternatively, the higher rate tax payer can choose also to give their higher rate relief to the charity. In this example, if he does so, the GBP300 donated to the charity is also grossed up, giving further relief of GBP75 (i.e. GBP300 at 25 per cent) available to the charity. The original gift of GBP800 has therefore provided the charity with GBP1,375 (plus the transitional relief, in this case of GBP25.64 = GBP1,400.64).

For its part, the charity must confirm the Gift Aid declaration in writing and file a claim form with the Revenue notifying them of the donations received, a procedure that has proved to be fairly cumbersome. This had led to pressure for reform of the system and the Chartered Institute of Taxation has been considering various options for change.

For donors, the procedure is relatively straightforward, although many donors are likely to fail to keep the records needed to make a reclaim for the higher rate relief through self-assessment. For those who do not need to complete a self-assessment return, Form P810 may be used to make the reclaim.

Most importantly, the donor should actually have paid enough income tax (and/or capital gains tax) in the tax year in which the donation is made. This should be at least equal to the amount of basic rate tax the charity is reclaiming on the gift. If the donor has not paid enough tax, HMRC can request the shortfall from the donor himself. The income to which the tax reclaim relates could be any type of income such as tax on employment income, tax deducted at source from savings interest, tax on the state pension, on investment or rental income or capital gains tax on gains. Problems for an individual may arise where there is a significant reduction in income in one year and they have completed a declaration in the past that allows a favourite charity to reclaim tax on any future donations. However, if an individual has not paid sufficient tax in a particular year, he may be able to backdate the donation to the previous tax year.

It is less well known that charities can reclaim tax on donated goods. This means that donations to a charity shop may also come within the Gift Aid scheme, but the procedure is particularly time consuming for the charity.

There is an interesting interaction between deeds of variation and Gift Aid. This was highlighted in the recent case Harris v HM Revenue & Customs.3 In that case, Gift Aid relief was denied to the charity (at basic rate) and to the donors (at their higher rates of tax) on the basis that they had received a benefit in the form of the reduction of inheritance tax in the estate. 4 This problem of benefit is not thought to arise where the variation is of a specific tax free legacy rather than a variation of a share of residue. This is because where a legatee has varied a tax free legacy in favour of a charity, he is not obtaining any benefit in reduced inheritance tax, which is payable by the residuary beneficiary.5

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Amanda Edwards

Amanda Edwards TEP is an Associate in the Private Client and Tax department at Boodle Hatfield LLP.

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