Expert View: Gift Aid - How to keep the tax you've reclaimed

When a charity has put great effort into making as many of its donations as possible eligible for Gift Aid, thereby boosting its income from tax repayments, it is frustrating, and costly, for it to discover that tax has to be repaid.

This fate has befallen many charities when they have had a Gift Aid audit by HM Revenue & Customs and have not satisfied the auditors that all requirements of the Gift Aid scheme have been met.

The risk can, however, be reduced by the way charities handle their claims. And from March 2008, HMRC has adopted a more lenient approach, which should help all well-run charities.

HMRC now checks a sample of donations and calculates the value of those that have errors. The amount involved is then used to calculate an error rate as a percentage of the total tax claimed on the donations checked.

The changes introduced in March 2008 allow errors to be corrected and HMRC will either ignore other errors or ignore earlier years, providing the errors are within certain limits. This may be only a temporary reprieve - charities will have to show improvements by the time of their next audit or tax for the earlier years will be claimed back. HMRC is using the football analogy of issuing a 'yellow card' in these cases. "Correction or repair", as HMRC calls it, is a major relaxation in its procedures.

The most common errors relate to Gift Aid declarations. If these cannot be found or are incomplete, charities can contact donors and try to obtain replacements.

By improving Gift Aid administration and following the new relaxed procedures, charities can reduce the risk of having to make substantial repayments. By keeping the error rate below 4 per cent - whatever the amounts involved - charities are, at worst, at risk for one year's tax. It ought to be possible for most organisations to keep their financial administration to within 96 per cent accuracy, after allowing for corrections.

If charities' error levels are below 4 per cent and the amount of money HMRC could recover is less than £100, it does not seek to recover anything.

For amounts larger than £100, HMRC recovers Gift Aid for the audited year, but not for previous years. For amounts over £500, it also issues a yellow card.

For error rates higher than 4 per cent, but amounts less than £500, HMRC will recover Gift Aid for one year only and issue a yellow card. For error rates above 4 per cent and amounts over £500, it will seek to recover Gift Aid for all years.

 - Tony Austin is a tax partner with accountancy and consultancy group Mazars

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