HMRC does not check every item, however, but looks at a random sample. The tax on donations where supporting records are not sufficient, as a percentage of the total tax on donations in the sample, gives the error rate and this rate is then applied to all repayment claims to calculate the tax to be paid back to HMRC.
This extrapolation can, of course, have fundamental flaws. It assumes that the sample is statistically the right size and is representative of what has happened over a long period of time. This is not always the case: errors can arise less often with some types or sizes of donation than with others, depending on the charity's administration.
As the audit uses a statistical sample of claims, the forms used must be representative of other claim forms if the result is to be extrapolated correctly. However, not all donations are collected in the same way by the same charity and there may be different procedures for different types of donation.
For example, regular donations might be recorded on a database and a file kept of Gift Aid declarations going back to April 2000. On the other hand, donations from sponsored events will usually have come in with sponsorship forms. These might not be that well completed and dealt with by staff not normally involved with Gift Aid but brought in to cope with the additional work. A charity might also have a small number of very large donations and a large number of small ones. They could be regular or irregular, perhaps as a result of a special appeal or fundraising campaign.
If the charity maintains separate records for these different types of donation or events and submits separate repayment claims, it means any errors on one type cannot be extrapolated to the others. HMRC now recognises this and actually has modified the procedures it will accept for sponsored events, which can be found in chapter six of its guidance Detailed Guidance Notes for Charities, which can be found on its website.
Charities must consider the new relaxed procedures and their Gift Aid administration, particularly the way different types of donations are dealt with, in order to reduce their risk of having to give back tax they have reclaimed.
- Tony Austin is a tax partner with accountancy and consultancy group Mazars