Gift Aid: Dispelling the myths
It has been said many times that the tax rules in the UK are complex and confusing – Gift Aid is no exception.
Where specific conditions are met, Gift Aid can be claimed on cash donations that are received from individuals who pay UK tax. It is acceptable to give benefits in return for cash payments and as long as the value of the benefits do not exceed HMRC’s limits, the ‘payments’ can still qualify for Gift Aid.
But remember we are dealing with UK tax procedures. Additional rules allow some benefits to be completely ignored and others to be valued in special ways. In practice, charities aren’t always aware of all the rules and do not always apply them correctly. In our experience charities frequently over-value their benefits and do not claim as much gift aid as they are entitled to.
The key questions are: Is the charity really providing a benefit? If yes, what is the acceptable Gift Aid value of the benefit.
If there is a connection between the donation and a benefit being received the benefit rules need to be considered before Gift Aid is claimed. In practice, the following rules are frequently overlooked or applied incorrectly:
The following arrangements can be ignored when calculating the value of benefits for gift aid purposes:
- Acknowledgements of a donor’s generosity unless this amounts to the promotion of a business activity.
- Admission to view charity property where the donation is at least 10% more than the normal admission charge or the admission is for a period of at least one year (at the same time as public admission). HMRC has said that these rules do not apply to virtual and online tours.
- Literature that describes the work of the charity and which is distributed (in hard copy or digitally) to further objects. This applies even if it has a cover price, is on sale to the public or produced by a third party. Consequently, newsletters, bulletins, annual reports, journals, magazines, members’ handbooks and programmes of events normally have no value for Gift Aid purposes.
- Fundraising events (including dinners that honour donors) are not classified as benefits for Gift Aid purposes. So, events that thank donors, promote a charity’s activities and stimulate more donations from others can be ignored.
- Surprise benefits. If a donor is not aware that they will receive a benefit when they make their donation anything they subsequently receive can be excluded from Gift Aid calculations.
When benefits are provided the following rules are sometimes overlooked when they are valued:
- Benefits that are also sold to the public should be valued according to their normal retail value. A £20 theatre ticket will be valued at £20 if it is given to a donor. If the donor has to pay £10 for the ticket, the benefit is £10. If they pay £20 there is no benefit.
- If the benefit is attendance at a free event that has no fundraising purpose and is not open to the public, the value should only be based on the direct costs associated with the event. There is no requirement to include an element of general overheads. The costs are then divided by the number of people attending the event to confirm the benefit per person. If there are no restrictions on the number of people who could attend an event the costs should be divided by the total number of invited people.
- Discounts – you will need to retain records of all the discounts received by members to be able to establish an average benefit.
- Life memberships – the value of all benefits to be received cover the lifetime of the membership forms the value of the benefit. For practical purposes, the benefits received over the first 10 years are taken to be the lifetime benefits. In practice, the benefits for a 12-month period can be confirmed and multiplied by 10.
- Online or digital benefits – this will be a benefit when donors receive something that is not available to the public. The VAT status of digital content needs to be considered and could result in a requirement to charge and account for VAT in other EU countries.
- Priority booking rights - the retail value is not always obvious or available. Consider how much someone would be prepared to pay for the service. If this isn’t possible HMRC will normally accept any method of valuation that is fair and reasonable.
In the current climate, charities will undoubtedly be looking to maximise Gift Aid claims wherever they can. They should make sure that fundraising literature clearly confirms the benefits being provided and they should retain evidence to support their position and basis of valuations.
For further information please contact a member of our tax team or your usual Azets contact.