After some months of discussions, HMRC has agreed to change the health warning on the Gift Aid declaration that charities should use from 6 April 2016.
The declaration has been shortened, with the references to Council Tax and VAT removed. However, new wording has also been added making it clearer that if a donor has paid insufficient tax to cover their donations, then they are responsible for paying the difference.
Some commentators have suggested that this phrase will put donors off from signing up to Gift Aid. In fact, HMRC commissioned behavioural scientists to study donor behaviour as part of their review of Gift Aid. This suggested that the majority of donors were confused by all the Gift Aid paperwork anyway and a significant proportion thought that it would cost them money. So whatever the wording on the declaration, charities will have to work harder at explaining Gift Aid and encouraging take up.
This could be tough in coming years as the increase in personal allowances already announced by the Chancellor means that fewer people are expected to be paying tax. HMRC has already expressed concerns that it might be paying Gift Aid to charities where no tax has been paid by the individual. In its November 2013 report into Gift Aid and relief on donations, the National Audit Office estimated that £55 million might be paid in error in refunds to charities where the tax had not been paid by the individual donor. Following the Charity Tax Group conference earlier this year and other announcements by HMRC, we should be in no doubt that HMRC is keen to close this gap.
HMRC has also just updated its Retail Gift Aid Scheme guidance, which is available on HMRC’s website. Many charity shops selling donated goods use the Retail Gift Aid Scheme to claim gift aid on the proceeds from sales of donated goods. Charities using the Retail Gift Aid Scheme should make sure that they review the revised HMRC guidance and make any necessary changes to their procedures. The guidance now contains a greater emphasis on staff training and internal checks on procedures, rules about having staff incentive schemes for this and requires shops operating Retail Gift Aid to have a notice in the window explaining that some items are sold as agent for others.
So what should charities be doing?
- Firstly, charities should update their Gift Aid declarations to follow the HMRC new requirements. HMRC has announced that charities should use the new wording for all new declarations dated 6 April 2016 or later but it has also accepted charities may use up old stocks of printed declarations after 6 April 2016 provided they were ordered and printed before 21 October 2015. There is no requirement to replace old declarations which conformed to the HMRC model wording when issued, these remain valid. Charities also must remember to update the wording on gift aid declarations on websites, on text messages and on the confirmation letters that are sent for oral declarations
- It might be an idea for charities to test their systems. When HMRC conducts an audit, it takes a Gift Aid claim and checks back to the charity’s records of receipts and the declaration. Select a sample of 100 entries on a claim and ensure that you can perform this audit test. You are permitted an error rate of 4 per cent by value and less than £500.
- Consider ways to store declarations safely and in a form that allows them to be retrieved easily. You can outsource scanning of documents and as long as they are referenced properly this can be an efficient way to store them. Many charities that make substantial Gift aid claims now use special donor management software that can store scanned declarations, donor and donation details and make Gift Aid claims. HMRC provides a list of Gift Aid software products that have been tested as having successfully interacted with HMRC’s charities online system*.
- It is wise to segment your donations so that Gift Aid claims are made for each type of donation. For example, you might process major donors separately from the London Marathon runners, carrying out a higher level of checking to make sure the Gift Aid requirements are met. This can be helpful in terms of audit tests as an error rate can then be ‘ringfenced’ to the particular type of donations. You need to flag this approach in advance to HMRC when it announces an audit check, and provide it with information about your methodology.
- Think about using oral declarations. These can be used in face to face situations, such as in charity shops, at events and over the phone. Charities assume that they must get a signed declaration, but it may be easier to ask for an oral declaration, collect an address and email, and then send the donor a written confirmation. These confirmation letters should be updated to include the new model wording
- If you operate the Retail Gift Aid Scheme, review the new HMRC Retail Gift Aid guidance**, amend your procedures and undertake staff training to ensure you are following it.
It seems likely that the level of Gift Aid payable to charities will plateau over the next few years as more people drop out of paying tax. If this is HMRC’s expectation, then it will be selecting charities with high and increasing levels of Gift Aid claims for inspection. So make sure your processes and systems are compliant – at least within the acceptable error rate.
Helen Elliott is partner Sayer Vincent LLP.