Gift Aid: Common pitfalls

In our previous blog, we explained what Gift Aid is, and how to go about claiming it. Here, we look at some of the pitfalls that charities often encounter when making Gift Aid claims, which can result in the claim being rejected or payment delayed.

By way of a reminder, there are a number of conditions that must be satisfied before a charity is able to claim Gift Aid on its donations, the most important of which are:

• The gift must be of money, and must be made by an individual who pays UK tax.
• The donation must be a genuine gift, and must not be subject to any condition as to repayment.
• The value of any benefits received by the donor in consequence of making the gift must be within certain limits.
• The individual making the donation must provide a Gift Aid declaration to the charity in relation to the gift.

Charities often seek to claim Gift Aid despite inadvertently failing to meet the above conditions.

For example, Gift Aid should not be claimed if the donation is not the donor’s own money. So, if an individual donates the proceeds from a coffee morning or raffle, for example, Gift Aid must not be claimed: the donation is of other people’s money; it does not belong to the individual making the donation.

The Gift Aid claim must, as a minimum, contain:

• The donor’s prefix (Mr, Mrs, Prof etc), initial and surname;
• The donor’s house name or number, and postcode;
• The date on which the donation was made and the amount donated.

If any one of these details is missing or incorrect, there’s a risk that the claim will be rejected by HMRC.

Gift Aid can only be claimed on donations received from an individual who pays income tax or capital gains tax in the UK. If a donation is made by a company, Gift Aid must not be claimed. We understand that HM Revenue & Customs’ software scans Gift Aid claims to look for addresses that might be non-residential. So, if an address is entered as ‘Unit 12’, for example, this might result in the Gift Aid claim being challenged.

Similarly, while it may well be the case that a UK taxpayer lives overseas, if the Gift Aid claim includes an overseas address, the charity should expect the claim to be looked at carefully by HMRC, who would wish to be sure that the donor does indeed pay tax in the UK.

Charities have been known to try to claim Gift Aid on the value of non-cash donations, such as donations of shares, artwork or antiquities. This is not possible. Gift Aid can only be claimed where the gift is of money.

Perhaps the most common pitfall encountered by charities, however, is where they seek to claim Gift Aid on a donation which is not, in fact, a donation. For example, a charity might ask for donations at a fundraising dinner, with the names of donors subsequently being drawn out of a hat to win donated prizes. The question arises as to whether the amounts donated are indeed donations, or whether they are, in effect, a payment for a raffle ticket (which would not qualify for Gift Aid). Similarly, Gift Aid should be considered very carefully in relation to charity auctions and charity membership schemes: is the amount being ‘donated’ really a donation, or is it payment for the auctioned item or membership benefits?

Another common area of difficulty is adventure activities, such as where an individual is required to raise funds of at least, say, £1,000 for charity in order to be able to participate in a sky-dive. It is unlikely that Gift Aid can be claimed on amounts donated by the participant or their relatives, as they are, in effect, paying for the individual’s participation in the activity.

These are just some examples of situations where amounts purported to be donations might not be eligible for Gift Aid. The question of whether or not Gift Aid can be claimed must be considered carefully in all cases where there is any form of reciprocity (whether or not contractual) between the donor and the charity.

That is not to say that charities cannot offer tokens of thanks to their donors, but any benefits provided to donors must be within the following limits:

• For donations up to £100, 25% of the donation; otherwise
• £25 plus 5% of the donation in excess of £100, subject to a maximum of £2,500.

Placing a value on benefits provided to donors can be difficult. Where an item or service is sold to the public, the value of the benefit will be the price payable by the public. In other cases, the charity will need to determine a market value of the benefit. The value of a benefit is always the value to the recipient, not the cost to the charity of providing the benefit.

For all donations on which charities claim Gift Aid, the charity is expected to be able to identify the relevant credit to their bank account and Gift Aid declaration, and to maintain an audit trail between them. If HMRC were to undertake a detailed audit of the charity’s Gift Aid processes and find a sample of Gift Aid claims for which an appropriate audit trail could not be established, they may seek to recover Gift Aid claimed in the period of review, and also in previous years, based on the sample size chosen for review.

So, while Gift Aid is an essential source of revenue for the charity sector, there are a number of pitfalls for the unwary.

Please do get in touch with your usual Larking Gowen contact or email enquiry@larking-gowen.co.uk if you would like us to review your Gift Aid processes to ensure that they are consistent with HMRC’s requirements, and to ensure that they are maximising the Gift Aid to which you are entitled. We’d be very happy to help.

Andrew Robinson