30 April 2014

A Day Out with the Charity Tax Group

Graham Elliott
Consultant | UK

Every year the Charity Tax Group (CTG) has its annual meeting. I thought that it was about time that an example of this annual event was celebrated in a blog. As this is a blog, and not a ‘review' or an ‘article', I am going to be selective in what caught my notice. The meeting was on 28 April 2014. I was involved both as a spectator and a panel participant towards the end of the session. These are the points which I thought were particularly interesting.

Gift aid reform

A matter of two days or so before the meeting, HMRC and the CTG agreed a joint document signposting the possible way to significant reform of the gift aid donor benefits regime. The current regime creates difficulties of interpretation. It is based on the general principle that a payment is either subject to a gift aid claim or is not, on an in/out basis. As to whether it qualifies, this is partly determined by the amount of benefit that arises in consequence of the donation being made. Thus, if you exceed the donor benefit limits you lose all of your gift aid. Whilst there are ways round this, they are tricky to engineer and make life complicated. An alternative suggestion is now being floated. This is to expand the classes of ‘benefit' to be entirely ‘disregarded'. On top of that, a certain percentage of the value of the donation will be allowed to be given back in benefits without reducing the gift aid that can be claimed. As to what happens if that limit is exceeded, this is where the big difference arises. In that case any amount of the excess value of benefits given would be deducted from a gift aid claim which the charity itself would make. Accordingly, the limit would be an allowance rather than a threshold. Thus, gift aid would not become an ‘all or nothing' thing. This would be tied to viewing gift aid holistically, rather than on a ‘donor by donor' basis, taking a view as to whether the benefits overall exceed the relevant limits when assessed across a pool of donors. This would reassure nervous fundraisers who realise that, if they overstep the mark on the benefits, even inadvertently, they threaten the entire gift aid basis of the campaign, whereas under these proposals, they would merely erode the gift aid value to some degree. In my view this is a great idea. It needs more work, however. The value of the allowance is a very important factor. CTG is minded to have it set at 5%. HMRC offers 1%. This is an enormous gulf. Perhaps there will be a compromise around 3%, but can such horse trading really be successful? In any case, there is also the difficulty of dealing with marginal tax relief for additional and higher rate tax payers. There are a range of other potential difficulties, but we have to face the fact that the current system is troublesome both for HMRC and for charities, so we must wish this negotiation well and put our shoulders behind the cause.

Social investment tax relief

There were a number of comments made about this new tax relief, and I will not rehearse the ‘rules' which were announced as part of the Budget, as these can be picked up in a variety of other sources. But I found it interesting, in the breaks, talking to delegates, as to the diversity of views over its probable effectiveness. This ranged all the way from ‘what a load of nonsense' to ‘this is the most exciting and beneficial development we have seen in years'. In between we had the ‘it might work but will not amount to very much', and the ‘how disgraceful that a tax relief aimed at the rich will effectively rob the poor despite being good for certain charities'. (I mention that none of these quotes is verbatim, but rather reflect the tenor of the comments made.) I have to admit to some degree of agnosticism on this. If it works well, that is brilliant. We would, of course, be very happy to advise people as to how it can be made to work, and if it does work well, it will encourage positive initiatives by government in the future.

Charities Online

One year on from the launch of Charities Online, which is basically a new way of submitting gift aid claims, we wanted to hear how things were going. We heard from HMRC that they were really going rather well. This is truly excellent news. But it was acknowledged that all we had really done was automate certain aspects of the claim making process. Whilst this has improved some automatic error correction and claim rejection, there is still a great deal that HMRC has to check on standard gift aid audits, and perhaps this has been an evolution rather than a revolution. The thing that HMRC cannot spend sufficient money on is instituting a full scale computerised approach to weeding out claims in respect of non-tax payers, insufficient tax payers, and people who have disappeared off the face of the earth. A problem which HMRC pointed out was that a strikingly high percentage of the adult population do not qualify to make a gift aid donation (42%). It is estimated that as much as £50 million is lost in gift aid rebates to charities where there is no tax paid by the donor to match against it. It should be noted in passing that this is partly due to an inability to match a donation against anything other than tax in the year in which it was paid. It would be interesting to know what proportion of this £50 million figure would evaporate if there was an ability to carry back donations to an early year in which one had paid sufficient tax. But, we are where we are on the law. This is clearly a major compliance issue and it will only become potentially more difficult as there is an increase in donations via digital means, on which it was interesting also to have some feedback …

Digital giving

HMRC told us that, as a result of their consultation on how to deal with text donations and similar arrangements, they had gone for an evolutionary rather than a revolutionary approach. It was clear that the world was not yet ready to shift the liability for unmatched tax from the donor to the charity. Accordingly, HMRC could not agree to a much reduced gift aid declaration used by digital donors, since that would not make clear enough to the donor their potential liability to pay the unmatched tax. The debate then shifted to whether, leaving that difficulty aside, more could be done to clarify and simplify the message whilst giving the donor no doubt whatever about the true circumstances. How can this be done without frightening donors away, but making it sufficiently clear what the legal position is? This is always going to be a difficult issue. The concept of a universal database which would hold the details of bona fide gift aid contributors was aired. The Government has not got the money to develop such a database. The sector probably cannot corral together such funds either. We are therefore at an impasse. What would be desirable, in my opinion, would be the development by somebody of a system which allowed charity gift aid claims to automatically be cleansed of false entries so that the only amount that was paid out to charities was the correct amount. This would be, in effect, the universal database, but working entirely automatically. We can but dream …

So, what about VAT?

Well, VAT was very much the second best subject in the conference this year. To my mind, the most interesting part was the one which I chaired myself (although of course I would think that), namely a session on the efficacy (or otherwise) of the cost sharing exemption which was introduced in July 2012. When I asked the delegates whether they had implemented a working version of the cost sharing scheme, only two people said they had. Those who said they had plans which they were minded to launch at some stage, and were ready to be launched, amounted to a further two. When I asked how many people had given active consideration, but had decided not to proceed, or to delay until they had found solutions to serious problems, at least thirty hands went up. So, whilst the opportunity has been taken up, it has been taken up very rarely, and most people are finding it too difficult to implement. There is some evidence that the exemption works better in certain other countries which have not applied it in such a rigid and impracticable format. The lesson for HMRC is that, if it wants to provide real help to the sector, it needs to adopt a more practical approach to its administration of VAT. So, perhaps in summary, there are serious difficulties in encouraging gift aid, but efforts are being made to deal with this. There are serious difficulties in sharing resource and services, but inadequate steps have been taken on that.

Graham Elliott Consultant | London

Category: Blog

Client types: Charities and non-profit