HMRC confirms that donations made by waiving a refund or loan repayment are eligible for Gift Aid in the UK

Article 07 June 2021 Experience: Charities and non-profit

In our April 2020 charities coronavirus update, we wrote about HMRC’s temporary change to Gift Aid rules for processing refunds in relation to cancelled events. Previously, HMRC’s general guidance had made it clear that a donation ‘must be a payment of a sum of money. A donation cannot be made in kind, by loan waiver or by debt/loan conversion.’

This position was temporarily changed in April 2020, as HMRC confirmed that the government would allow Gift Aid to be applied to all donations made of amounts equal to the price of tickets for events cancelled because of COVID-19. This was an important change for many charities early in the pandemic.

HMRC has now made a further important update to its detailed guidance notes in relation to what it considers a donation, and what types of donation are eligible for Gift Aid. A newly inserted Chapter 3.45 confirms that HMRC will consider that donations to charities can be made via a waiver of a right to either a refund or loan repayment, and that such donations are eligible for Gift Aid. This seems to be an extension of the change made in April 2020 in relation specifically to refunds for tickets to events cancelled by reason of COVID-19.

In order to be eligible to receive Gift Aid on donations made by waived refunds or loan repayments, the charity must ensure it holds a record of the formal waiver, and that all other usual Gift Aid rules are met. A Gift Aid declaration will need to be collected by the charity if one is not already held for the donor.

What precisely constitutes a ‘formal waiver’ for these purposes will depend on the amount being waived.

For a small amount, the charity should ensure it keeps an auditable record of correspondence with the taxpayer. An email exchange or recorded telephone call will suffice, provided that the donor confirms that no refund is required and that the waived amount should be treated as a donation. For larger amounts, such as a waiver of a substantial loan repayment, a legally enforceable document will need to be in place and kept for audit purposes. This document must include details of what is being waived, confirmation that this is to be treated as a donation for Gift Aid, and that the donor is giving up all legal rights to future repayments.

Regardless of the amount, it is very important that the charity explains clearly to the potential donor that they have a choice between either obtaining a full refund or waiving that right and having it classified as a donation. The donor must have clearly positively chosen to waive the amount. Further, charities should be careful not to pressure individuals into donating in this way.

This is a positive change in guidance from HMRC, and a potentially helpful additional source of donations for charities on an ongoing basis. For further information on Gift Aid rules or these types on donations, please contact our Charities Team.