Tax Effective Giving and VAT
- What is Gift Aid?
When you make a donation to a charity, CASC or voluntary organisation that is registered with HMRC, that charity is able to claim back the tax that you have paid on the donation. This mechanism is called Gift Aid and amounts to an extra 25p for every £1 that you give. If you give £10 to a charity and you are a basic rate taxpayer (20%), you will have paid £2.50 in tax on the gross donation (to take home £10, you will have earned £12.50 before tax). Charities are able to reclaim this £2.50 back from HMRC.
- What donations can I claim Gift Aid on?
You can claim Gift Aid on gifts of money from individuals in the form of cash, cheques, direct debit or stand order payments, credit or debit card payments or postal orders. Other donations can also be eligible for Gift Aid even though they aren’t strictly defined as gifts, for example membership subscriptions, charity auctions or the sale of goods. These are quite specific situations, however, and so it’s best to read HMRC’s detailed guidance on Gift Aid rules in specific situations.
- How do I claim Gift Aid?
You must be a UK taxpayer for your donation to qualify for Gift Aid. You must have paid or will pay an amount of Income Tax and/or Capital Gains Tax for the current tax year (6 April to 5 April) that is at least equal to the amount of tax that all the charities and Community Amateur Sports Clubs (CASCs) that you donate to will reclaim on your gifts for the current tax year. Other taxes such as VAT and Council Tax do not qualify. The charity will reclaim 25p of tax on every £1 that you have given. You will need to inform the charity that you are a UK taxpayer and you would like them to reclaim the tax on your donation. You will do this by making a Gift Aid declaration, most commonly done by filling in a simple form, provided to you by the charity. You can see a sample Gift Aid declaration form here.
- What’s the Gift Aid Small Donations Scheme and how does it work?
The Gift Aid Small Donations Scheme (GASDS) allows eligible organisations to claim top-up payments from HMRC of up to £5,000 on any small cash donations that they receive. The scheme applies to cash donations of £20 or less, received after 6 April 2013. Charities and Community Amateur Sports Clubs (CASC) need to meet certain conditions so they can qualify for the scheme.
- How does Payroll Giving work?
Payroll is one of the most tax-effective methods of giving to charity. It enables employees to donate to charities as a pre-tax deduction from their salary. 8,000 UK employees currently offer Payroll Giving schemes, and 1 million employees give regularly to good causes each pay day. Last year, Payroll Giving raised £155 million for good causes. This was an increase of £31 million on the previous year. Employers enhanced their employees' giving by an additional £7.5 million last year.
- How do I sign up for Payroll Giving?
The individual (who must be on PAYE) decides on the amount and the charity/charities who should receive it, and informs their payroll department. The employer must have set up a relationship with a Payroll Giving Agency (PGA). PGAs are registered charities, regulated by HMRC, who receive the donations and transfer donations from employers to charities.
- What are the tax reliefs for leaving legacy gifts in wills?
Legacies are an important source of income for many charities. Lifetime and death transfers of property to a UK registered charity are exempt from inheritance tax. Gifts to charity are deducted from the value of the estate before applying the nil band and calculating the inheritance tax due.
As an additional incentive for people to leave part of their estate to charity, a new inheritance tax relief was introduced for deaths on or after 6 April 2012. Where at least 10% of a person’s net estate is left to charity, the rate of inheritance tax is reduced from 40% to 36%.
VAT : Top tips for Fundraising Event
1. A charity which organises its own events for the purposes of raising funds will fall within the ‘one off fundraising event exemption’
2. This means that admission fees paid by participants to enter the event will be exempt from VAT. However, any costs in relation to the event will only be treated as exempt input tax and therefore recoverable if the charity is classified as ‘deminimis’ for partial exemption purposes. (Deminimis means that VAT incurred relating to exempt supplies is recoverable if the amount of VAT incurred per year is less than £7,500.)
3. The buying of a place by a charity in an event place organised commercially by a third party will be subject to VAT at the standard rate. This amount of VAT collected by the charity is paid to HMRC and referred to as output tax.
It is critical that the charity has an agreement in place with the participants of an event if there is a fee or sponsorship target to reach. This agreement should outline the conditions of their event place and any fees paid. HMRC can review these agreements to make sure that the charity is declaring the correct amount of VAT
4. Output VAT will be due on the sale of third party event places in the following situations:
a) If you choose to charge a participant a registration fee which must be paid before the event takes place, this fee will be subject to VAT at the standard rate
b) If you require a specified amount of sponsorship in advance of the event taking place, HMRC regard this as also being subject to VAT at the standard rate
5. Donations received over and above the registration fee/ minimum sponsorship amount are exempt from VAT charges
6. Whether you can recover input VAT on events organised commercially by a third party depends on whether or not the charity charges a registration fee to the participant. Input VAT is the VAT which you incur on third party expenditure by your charity
a) Registration fee – full recovery of VAT on the event places
b) No Registration Fee – partial recovery of VAT on the event places
7. Input VAT recovery on other costs such as t-shirts, fundraising packs, event receptions and other associated costs will be partially recoverable as a cost of raising unrestricted funds
8. If you offer top prizes to your fundraisers, these are not benefits for VAT purposes. However, input tax on the cost of the prizes will be irrecoverable as you will be giving them away for free.