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Monthly Tax Review by Matthew Hutton, MA, CTA (Fellow), AIIT, TEP

Matthew Hutton MA, CTA (fellow), AIIT, TEP author and presenter of Monthly Tax Review, outlines the unfortunate consequences of a taxpayer’s generosity, and comments on advice given by HMRC.

Context

The principles of Gift Aid relief seem straightforward enough and are apparently well understood now by the world at large. But the following real life example contains a salutary warning.

Example: the story of Mrs Cheeryble

Retired Colonel and Mrs Cheeryble were for years regular supporters of the League of Friends of their local hospital, gift-aiding a monthly donation as well as turning out for fetes, raffles and the like.

Colonel Cheeryble needed major heart surgery but, despite excellent care from their local hospital, ultimately died. The widowed and childless Mrs Cheeryble is left very comfortably off: a reduced income of course, but the house and investments are now her’s and there is substantial liquidity from life assurance policies.

A few months later, the League of Friends is in need of a significant sum to fund the balance to buy a special machine for the cardiac unit and, grateful for the efforts that were made on her husband’s behalf, Mrs Cheeryble decides that rather than including in her Will the legacy she would have left the League, she will make a donation now.

With the minimum of fuss and very nearly anonymously, she hands over a six-figure cheque. She declines being the guest of honour at the opening of the ceremony and thinks little more about it - until, months later, a large tax assessment arrives from the Revenue, triggered by her generous gift to charity. How?

The problems presented by over-donation

The system of Gift Aid presupposes that the donor has paid a sufficient amount of income tax or CGT in the relevant year for the charity to recover from HMRC the tax deducted at source. The legislation is quite clear that if the taxpayer ‘over donates’, the charity is fully entitled to reclaim the tax. This is quite reasonable, but how is the charity to know the personal circumstances of each of a multitude of donors? FA 1990, s 25(8) states: ‘Where the tax treated as deducted from a gift by virtue of subsection (6) above exceeds the amount of income tax and capital gains tax with which the donor is charged for the year of assessment, the donor shall be assessable and chargeable with income tax at the basic rate on so much of the gift as is necessary to recover an amount of tax equal to the excess.’

Mrs Cheeryble made an exceptionally large donation to a single charity and found herself with a large assessment. A parallel problem can arise from the fact that many Gift Aid declarations - including the HMRC approved wording - fail to make it absolutely explicit that the tax you pay is not matched with charities individually (which is how you sign the forms), but globally. The fact that you pay sufficient tax to cover the amount of your donations to each of charities A, B or C is not enough: it must be enough to cover the global donations to A, B and C.

From the HMRC website, the useful ‘Gift Aid toolkit’

A close examination of the apparently user-friendly sentences starts to reveal some inadequacies.

The standard description of Gift Aid is as follows:

‘Use Gift Aid and you can make your donation worth more. For every pound you give to us, we get an extra 28p from the Inland Revenue. So just tick here. It’s that simple’.

This comes from the model Gift Aid declaration which ‘includes all the elements required by the Inland Revenue’. However, only later is any mention of tax made as one of the six essential elements of the donation, where HMRC’s recommended wording is:

‘To qualify for Gift Aid, what you pay in income tax and capital gains tax must at least equal the amount we will claim in the tax year’.

But one needs to have a good awareness of the theory underpinning Gift Aid to appreciate what lies behind that sentence. In particular, 28p in the pound is not even the basic rate of tax. From the wording ‘we will claim’ it would be easy to think that qualifying for Gift Aid relief is linked only to your payment to that particular charity, not to all your payments to all charities in that year.

The particular problem obviously derives from the case where there is a sudden and maybe unexpected drop in income, when cancelling Gift Aid declarations is hardly likely to be at the forefront of the mind.

The next problem is that the paraphrase of s 25(8) is reduced to:

‘To qualify for Gift Aid, what you pay in income tax or capital gains tax must at least equal the amount we will claim in the tax year …’

From this it would be reasonable to suppose that the penalty for failure to qualify is that the donation cannot benefit from Gift Aid, NOT that the charity gets the Gift Aid anyway and the donor suffers.

The detail of the Gift Aid toolkit declaration requires the declaration to cover one or more of four bullet pointed descriptions as follows:

• All donations I make from the date of this declaration until I notify you otherwise;

• All donations I have made to [name of charity] since 6 April 2000 and all donations I make in the future until I notify you otherwise;

• The enclosed donation of £[…];

• The donations of £[…] which I made on […].

Most taxpayers are going to choose, certainly, the first in preference to the third possibility.

A suggested fifth option

The author’s suggestion is that the Gift Aid toolkit should offer an additional form of wording which would scoop up all payments under a particular regular arrangement, but not absolutely every payment. There should also be a mechanism making it easier to charities to be able to remind donors of the possible impact of changes in the circumstances. After all, we are regularly informed that investments can go down as well as up and that smoking kills. So should there not be a simple form of words available in the toolkit which charities could include in newsletters, annual statements and so on, reminding of the need to review Gift Aid declarations if your tax circumstances, or the global amount of your donations to charity in that year, change significantly?

(Trusts and Estates Law and Tax Journal June 2005 p14, article by Judith Morris of Bircham Dyson Bell)

NOTE: The problem identified above has been enhanced by the recent relaxations in rules in cases of telephone donations: see MTR 11/05 Item 4.1.

December 2005

Matthew Hutton MA, CTA (fellow), AIIT, TEP

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