Almost 10 per cent of the tax relief paid on charity donations to both charities and donors last year could have been claimed through tax abuse or error, according to a report from the National Audit Office.
The spending watchdog’s report Gift Aid and Reliefs on Donations, published today, says £1bn was paid to charities in Gift Aid and £940m in tax relief to individual and corporate donors in 2012/13.
It says HM Revenue & Customs estimates that roughly £170m of tax was lost through fraud, avoidance and error in Gift Aid claims and other reliefs on donations in the same year.
But the report says HMRC recognises the methodology for the loss calculation is "crude and may understate the level of loss", and HMRC will begin a full assessment of these losses.
The NAO estimates that HMRC might be paying out a further £55m by mistake where donors have not paid enough tax to allow charities to claim Gift Aid, the report says.
The report also questions whether increases in Gift Aid paid to donors after changes to the system in 2000 had resulted in increased donations to charity.
It says HMRC is investigating 1,800 avoidance cases related to eight marketed tax-avoidance schemes that use reliefs on donations and could result in lost tax of £217m.
A further 200 users of the schemes withdrew claims worth £23m after the investigations.
Avoidance schemes under investigation include a charity that spent most of its income on fundraising events that involved entertaining the trustees’ friends and family, and another charity that loaned more than £70m to companies connected to the trustee with no commitment for the companies to repay the charity, the report says.
It does not name the organisations involved.
HMRC prevented the loss of £63m of tax fraud, avoidance and error on donation tax reliefs in 2012/13, up from £15m in 2009/10, the report says. It introduced additional checks on repayments in 2009.
The report recommends that HMRC and the Treasury collect better evidence of the impact of tax reliefs on donor behaviour. It says HMRC should work more closely with the Charity Commission and other regulators to identify problems with charities’ tax affairs.
Charities received £1.040bn in tax relief on donations in 2012/13, slightly lower than the £1.060bn they got in 1999/00 in real terms. But donors received £940m in 2012/13, more than seven times the £130m paid out in 1999/00 in real terms.
Amyas Morse, head of the National Audit Office, said in a statement about tax relief on donations: "The exchequer departments cannot demonstrate that these incentives are working, or that the increased cost to the taxpayer has resulted in a rise in donations to charity."
Asked to comment on the report, an HMRC spokesman said in a statement that the government had made "wide-ranging and generous reforms" to the tax support available for charitable giving since 2010.
"We have recently consulted the sector on modernising Gift Aid and we work closely with charities to make it as easy as possible for them to claim tax relief.
"However, it is important too that appropriate controls are in place. In the past four years, HMRC has doubled the number of staff involved in Gift Aid compliance, coming down hard on any attempts to abuse Gift Aid for any purpose other than delivering vital support to charities."