Posts Tagged: Gift Aid

Hands up if you understand Gift Aid… most charity employees don’t

One of the main reasons that the voluntary sector only claims a third of the Gift Aid available is because few people understand it well enough.

This is not widely discussed, but in my experience it is true. When it comes to how tax relief actually works, the charity sector is an ocean of uncertainty, dotted with islands of knowledge in specialist agencies, umbrella bodies and accounting departments.

Many trustees don’t understand it, some chief executives don’t understand it and, most worryingly, a lot of fundraisers – the people who are usually responsible for collecting Gift Aid declarations – certainly don’t understand it and aren’t incentivised to ask people for it. Possibly rightly, too, because when they do ask, it often puts donors off.

A lot of donors certainly don’t understand a word of it. Some of them tick the Gift Aid box; some of them don’t. Most of them then forget every word about it. For them, charity tax relief is a deep darkness.

The sector can improve the situation with better communication tactics.

Lindsay Boswell, chief executive of the Institute of Fundraising, has given one example. He says charities are more effective at collecting Gift Aid if they cut it out of their initial ask altogether, and leave it to a follow-up call when it can be explained properly to donors.

Another tactic, suggested by Theresa Lloyd, a fundraising consultant, is to write to all higher rate donors who are able to reclaim tax relief for themselves, explaining how to go about it. Hopefully, by doing them a favour, this will prompt them to give more in the future and make them more conscious of tax relief.

Another suggestion she makes is to run an information campaign for donors and charity workers alike.

Charities are entitled to point out the benefit of tax relief to themselves and launching a national campaign, funded by third sector organisations, might help explain how the system works.

It is hard to believe that with the best part of £2bn going begging last year, spending a few million on a campaign to improve take up is a losing bet.

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Can Gift Aid reform break out of this Sisyphean state?

When I was at school, an enthusiastic teacher decided to educate us in the Greek myths. One was the story of Sisyphus, who irritated Zeus, the king of the gods, and was condemned in return to push a rock up a hill for all eternity. Once the rock got to the top, it would always roll down the other side, and off he went again.

This piece of classical trivia has given rise to one of my favourite words, Sisyphean, describing a long and continuous labour with no obvious end in sight. It’s a word that could be used to describe Gift Aid reform, a process which has been going on in one form or another ever since this tax relief was first granted, and appears no closer to its conclusion.

The new government has said it will present a general plan for reform in September, and has pledged to “make an announcement about Gift Aid in the next Budget” – although it’s vague on what that announcement will be.

It’s doubtful that this will be an end to the process, but there may be some progress. However, none of the more radical proposals suggested last year – such as opt-out, accounts-based or higher rate relief for charities – look like they will be considered.

The sector seemed to be moving in favour of a composite rate – a single rate of Gift Aid for all donations below £10,000, with a corresponding loss of relief for higher-rate taxpayers but with an exemption for big donors who really care about their tax relief. It doesn’t look likely that this will happen, either. The Treasury is worried about its cost; HMRC is worried about the potential for fraud, and in any case both departments have bigger fish to fry.

What we’re likely to get is a promise to streamline the system, which may be a better deal for the sector as there are some real victories to be won here.

First and foremost is a promise to allow charities to file and store Gift Aid claims online. Second is a donor database, which would allow donors to confirm that they agree to Gift Aid on all donations they make to any charity in the future. Unsurprisingly, however, HMRC has shown little enthusiasm for keeping such a database.

There are other possibilities, too, but there is also one certainty: there is a still a long way to go.

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Charities could face tax bills that cancel out their relief

How much tax does the charity sector pay? It’s not meant to pay any, in theory. But in practice it pays a lot, it turns out, according to a very informal survey I carried out last week.

Having spoken to a few charities’ finance directors, it appears many operational charities pay around a tenth of their total income in tax – and this could increase considerably if post-election tax rises come in the form of VAT and national insurance.

We haven’t seen it in this Budget, but it’s likely to come in any post-election announcements. In a worst-case scenario, of every pound given to an operational charity, 12 or 13 pence could end up in the pocket of the Government.

In total, it’s possible the sector will end up paying more than £1 billion in VAT – and it could well be facing a similar bill for national insurance. Add on business rates, water rates, and other taxes that the Government hasn’t exempted the sector from and the bill starts to look pretty high.

In comparison, according to HMRC, the sector received £951m last year in Gift Aid, and around £2.3 billion in tax relief overall. Or to put it another way, the tax the sector doesn’t pay looks pretty similar to the tax it might have to.

So what should the sector do about it? Move all its money offshore? Hire a dodgy accountant to cook the books?

One answer – suggested by one of this site’s bloggers, Charles Nall, corporate services director at the Children’s Society – is to focus not on Gift Aid reform, where there is potentially little money to be had, but on tax reform.

Less fashionable, more difficult and less easy to understand – but the rewards are potentially much greater.

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Cancer Research UK’s proposal on Gift Aid reform is by no means perfect

It is good to see Cancer Research UK taking the lead on Gift Aid reform by supporting a 30p composite rate.

It’s an idea that means charities would receive 30p in Gift Aid on every £1 given by a taxpayer, and higher-rate taxpayers would lose the right to claim any personal tax relief on donations.

Progress was needed. Before there can be a sensible debate with the Treasury over reform, there needs to be something to discuss, and the plethora of different options that existed at the start of the year simply weren’t tenable.

However introducing a 30p composite rate would still raise problems. It’s difficult, for instance, to justify labelling a composite rate as tax relief rather than public expenditure.

That’s because the system would mean that if a donor gave £1 to charity, that charity would get an additional 30p even if the donor originally only paid 25p tax to get that £1. Can a tax relief give back more money than the donor originally earned and paid in tax? Or would it have to be called public expenditure?

At present, charities receive 25p as a tax relief on every £1 donation, and then another 3p in public expenditure – transitional relief. That public expenditure can easily be taken away, and in fact it will be in just over a year’s time.

Tax relief, by contrast, is much harder to withdraw, which means that any decision to reclassify Gift Aid as public expenditure would leave the sector vulnerable – and has been ruled out by third sector minister Angela Smith.

It may be possible to label a composite rate as tax relief – an argument between the Treasury and the ONS is going on over this at the moment – but it would not be an easy battle.

It’s also not clear how a composite rate would sit alongside payroll giving. Would payroll giving continue to roll on independently, offering a different system of tax relief to Gift Aid? Or would a giver receive an extra reduction in tax, above and beyond what he paid? Or would it be scrapped altogether? None of these options sound good.

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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.

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Has Gift Aid reform come any closer?

Some experts on giving and philanthropy have been wary about the idea of redirecting to charities the tax rebate that can be claimed by higher-rate taxpayers on Gift Aided donations. Such a move might have unpredictable effects on giving by the rich, they warn – especially in a continuing recession with a new 50 per cent tax rate looming for those earning more than £150,000.

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