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Gifts to charities by non-taxpayers

Published on 7 May 2004

The Government wishes to encourage people to give to charity. But its encouragement does not include giving by non-taxpayers. And there is a trap, which non-taxpayers ought to be careful to avoid.

What is gift aid?

If an individual makes a gift to charity and makes a declaration that he or she will pay sufficient income tax or capital gains tax to cover the tax on the gift, the charity can claim to be repaid the amount of the tax. If the donor pays tax at the higher rate, he or she can claim the higher rate tax on his or her tax return.

Someone on the top rate of tax of 40% only has to give £60 for a charity to recover £100, as this example shows:

Gross gift (including tax being paid by donor) £100
Basic rate tax at 22% claimed by charity £22
Gift £78

Higher rate tax at (40% - 22% = 18%) claimed by taxpayer/donor £18
Net cost of gift to higher rate taxpayer £ 60

Gifts by non-taxpayers

A charity cannot claim gift aid relief on a gift by a non-taxpayer. The non-taxpayer cannot make a declaration that he or she will pay sufficient tax to cover the tax on the gift.

In one sense this is fair enough. Since the donor has not paid tax on the money out of which the gift is being paid, there is no tax, which the charity can reclaim.

The Low Incomes Tax Reform Group believes however that this is wrong in principle and unfair. The Government introduced gift aid relief to encourage giving to charities. Why should non-taxpayers not be encouraged to give to charities as well as taxpayers, and why should charities benefit less from gifts by non-taxpayers than from gifts by taxpayers?

Moreover, if gift aid relief were available to charities on all the gifts which they received from individuals, it would save a great deal of work and cost for them in obtaining gift aid declarations from taxpayers and in tracking the gifts from them.

What happens if a non-taxpayer makes a gift covered by a gift aid declaration?

A non-taxpayer should not make a gift aid declaration. However a donor may think that he or she will pay tax in that year, but in the event may not do so. Moreover it may well be that, at the time the declaration was made, the donor was paying tax and it is only some years later that he or she stops paying tax: however the declaration will continue to run until the donor withdraws it. His or her income may have gone down because for example he or she has retired, been made redundant, or has had a baby, but he or she may forget that he or she made a declaration several years before.

If the Inland Revenue discovers that a charity has claimed gift aid relief on a gift by a non-taxpayer, the legal liability to repay the tax falls on the donor. The Inland Revenue has said that in these circumstances it would look to the charity to repay the tax; and doubtless most charities would do so. But, if the charity cannot or does not repay the tax, the donor will have to repay it. In the example given above, the tax to be repaid on the gift of £78 would be £22, so that the gift will have cost the donor not the £78 which he or she had intended but £100.

Similarly, if an individual makes a claim for repayment of the tax paid during the year, for example on bank interest, he or she may find that the amount to be repaid is reduced by the tax on the gift.

The Low Incomes Tax Reform Group has asked all charities to remind donors from time to time of the need for withdrawing a gift aid declaration if they no longer pay tax. However very few charities do so. In this way they are inadvertently setting a trap for some of their supporters. The only way to ensure that low income taxpayers do not fall into this trap is to extend gift aid relief to the gifts which they make.

If a non-taxpayer finds that he or she is being asked to make good the gift aid tax a charity has claimed, reference should be made to a statement in Parliament where the Economic Secretary to the Treasury said that the Inland Revenue would look to the charity to repay the tax (Hansard, Standing Committee F, 13 June 2002, col 402).

Contact Name: Robin Williamson (Contact tel: 0844 579 6700, Fax: 0844 579 6701)

Relevant Link: Gift Aid & 10% taxpayers or non-taxpayers - link to pensioner part of website

 

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