Gift Aid reform: here’s one reason why progress is slow

What is the charity sector trying to get out of Gift Aid reform?

Many systems have been proposed, but none have gained much traction with either the Government or the sector. Should we have an amended opt-in system or an opt-out system? What about an accounts-based system? Or a composite-rate system? Or a system whereby higher-rate relief is transferred from the higher-rate taxpayer to the charity, with a portion of tax retained by the Government?

I suspect progress is slow because charities are seeking two different benefits. One is a reduction in the administration costs of each donation, and that seems achievable. The other is a system that would make Gift Aid payments easier for charities to claim, which would mean the Government would have to pay out more cash on more donations. That seems unlikely.

The Treasury says it is keen on a ‘revenue-neutral’ solution to the problem, according to the academics who drew up its most recent report.  It’s unlikely that the agenda would include anything that cost the Government cash – certainly not in the middle of swingeing public spending cuts.

Some of the wider-ranging proposals for reform, such as a recent Treasury model for scrapping the current higher-rate relief and replacing it with a new benefit, are beginning to look like a dice roll.  

This suggestion involves getting rid of the 25p benefit to taxpayers and replacing it with a 25p benefit to charities. The move looks neutral, but it could reduce the total tax rebate on the donation, which would hurt donors more than it helps charities.

Would the reduction in the total value of the donation be compensated for by the fact that more cash ends up in the pockets of charities? Who knows? The only way to find out who would win would be to implement the new system and see.

And there is an added corollary: even if reform does work in favour of charities, the sector faces a large and expensive headache in the form of endless legal quibbles, new auditing procedures, reprogramming every fundraising database, and extensive in-house retraining.

All this suggests that charities should concentrate on cutting down administrative costs. One way to do this would be for the Treasury to implement an accounts-based system that would measure how much money charities receive, then to pay out a percentage.

But the Government hasn’t looked keen on this – possibly because it wouldn’t really be tax relief at all, but rather a donation from the public purse. It would be hard to measure reliably how much money charities actually receive in donations, which could open the door to creative accounting or even outright fraud.

But I do think this idea could work if it was confined to smaller charities which aren’t claiming large sums in Gift Aid and which would benefit most from reduced administration.

They could be allowed to claim a flat rate percentage of their donations as Gift Aid. A similar system has already worked with other tax reliefs; VAT rebates for small businesses are handled in a similar way.

Such a system would be easier to negotiate if the flat rate was set at a level no higher than the current average reclamation rate – just over 8p in every pound donated. It would save a lot of time and effort.

Perhaps larger charities should concentrate on streamlining the current system, rather than venturing into an uncertain world of wholesale reform.

7 Responses to “Gift Aid reform: here’s one reason why progress is slow”

  1. Tom McKenzie

    I agree that now is not the right time for charities to seek major reform of the current system–the costs involved would seem to outweigh the benefits. But would a flat-rate system for small charities survive more than one parliamentary term? Small charities often represent small or niche causes, which means that the preferences of a few donors would then be subsidised by the whole taxpaying population. Why should the masses stand for that? The rationale behind VAT rebates for small businesses is different in that they can stimulate economic growth which benefits everyone. A flat-rate tax-relief system for charities would separate donors from their donated income. Charities, small and large, should be concentrating on communicating the benefits of the current system, which are not yet taken up in full, instead of lobbying for change that risks destabilising their donor bases. The need for increased awareness of existing tax incentives is made quite clear in the HMRC/HMT report itself.

  2. David Ainsworth

    Thanks for the reply, Tom.

    The report you mention is available at:

    I’ll try to answer your comments.

    I do agree that charities should focus on getting the benefits out of the current system, rather than trying out a whole new system, but there are those who don’t have the economies of scale to do so. Those are the people that any reform should be aimed at.

    These groups should be able to claim without having to keep such detailed records. If their accounts show £10,000 donations, for example, they could just fill in one form and get £800 Gift Aid, rather than keeping loads of declarations and ending up in roughly the same place.

    (I’ve based the suggested reclaim rate on research we saw the other day, showing charities currently reclaim 8.47p for every £1 donated. Big charities can get this up higher – 15p or 16p, I think – so this figure may be high for small organisations.)

    This flat rate idea would be an option for charities, not a requirement – just like the VAT system is for small businesses. Charities could ignore it if they thought they could get more Gift Aid using the full system.

    Because it’s optional, it would be pure benefit to the sector. If it disappeared, charities would be back where they are now, with nothing lost. But I think it might survive, because it would benefit Government too, by saving admin inside HMRC.

    I would argue that the rationale for simple small business tax relief applies to small charities too. Small charities employ people, and stimulate economic and social growth in their communities, just as much if not more than small businesses do.

  3. Tom McKenzie

    The main objective of tax relief on charitable donations is to encourage donors to give more to organisations that are providing social benefits than they would want to pay in tax for the state to provide the benefits instead. Once donors are giving more, charities can employ more people, leading to economic and social growth in local communities. Society is better off.

    But if the link between the donor and the tax paid on their own donated income is removed, which is what would happen with a flat rate (as it would be the charity, not the donor, that decides whether or not to go for the flat rate), the direct incentive for the donor to donate will disappear. Worse, with a flat-rate subsidy for donations that no longer depends on donors’ taxpaying status, nontaxpayers could form new charities for themselves to glean the tax paid by others, which would be economically and socially destructive. There are good arguments for income redistribution from taxpayers to nontaxpayers but this should be achieved transparently through a general progressive tax system.

    Technology can lessen the administrative burden of Gift Aid at a reasonable cost; there may be a case for subsidising investment in such technology for small charities.

    A quick-fit system based on an average reclaim rate may sound attractive to some charities but if donors then reduced their giving, ultimately, the sector would lose out…


    Never having run a large organisation (and £4m counts as VERY large in my books) I can’t say whether one’s more rewarding or scary than the others, but running a small one scares the hell out of me because we often don’t know whether we’ll live through the next six months.

    • Debbie Walker

      Jackie – I understand what the thrust of the article is but £4 million turnover is a large charity – a £40 mil turnover is giant size!

      I think we really need a discussion in the sector about our perceptions because when we are describing a £4mill turover as a small charity then we’ve really moved away from our roots

      • Jackie Ballard

        Hello Debbie
        Size is all relative! Compared to my two previous charities – the RSPCA and Action on Hearing Loss – Womankind Worldwide is small, but I take your point that we are large in comparison to the majority of charities. I was also thinking of size more in terms of staff numbers than in terms of turnover. Our roots, of course, lie in volunteer led charities without paid professional staff and many charities have, in the purest sense, moved away from that.

        Perhaps all leadership is scary!
        best wishes

  5. Annie McDowall

    I think that the frustration of running a smaller charity (our turnover is just under £1m) is that you can get so bogged down in operational detail that you don’t have time or headspace to do the visionary thinking. I love having daily contact with our service users (which I didn’t have working for a large charity) and I like the kind of camaraderie I can have with staff and volunteers, and I know the same is true of my two senior colleagues; but I’d love us to have more resources so that we could really each play to our strengths!


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