If you have recently set up or are thinking of setting up a charity or not for profit organisation then it’s likely that you’ll rely on every penny of funding you get, whether that be from government grants, donations or through other channels. One of the ways charities and not-for-profits do this is through Gift Aid. But what is Gift Aid and how does it work.
In this short guide, I want to give an overview of what how Gift Aid works and the rules that govern how it is claimed.
How does Gift Aid work?
When someone gives money to a charity, whether that be through a voluntary donation or the purchase of goods from that charity (from a charity shop for example) then 25% of it can be claimed back by the charity, as long as that person is a UK taxpayer who is currently liable for either income or capital gains tax. If your charity raises a lot of capital from donations, then this can prove a very significant amount of money indeed.
There are strict rules for both the charity and the donor regarding what can and what can’t be Gift Aided, as well as the process for making claims.
Rules Governing Gift Aid
There are some important stipulations for any organisation that wants to claim Gift Aid and these are as follows:
- The organisation must be a recognised charity or community amateur sports club (CASC) to be eligible for Gift Aid. To qualify as a charity your organisation must be based in the UK, EU, Iceland, Liechtenstein or Norway, be run by ‘fit and proper persons’ and be registered with the Charity Commission, as well as HMRC.
- Not every type of donation is eligible for Gift Aid. These include donations from limited companies, Payroll Giving, payments on goods or services which your charity purchased, loans that no longer need to be repaid, shares and membership fees to CASCs. A full list can be found on HMRC’s website.
- Some Gift Aid donations have to adhere to different sets of rules as laid out by HMRC. The rules are too detailed to list in this article but cover donations made from sponsored challenges such as marathons, church collections, selling goods through charity shops, auctions, events and funds raised through charity membership fees. Again, details can be found on the HMRC website.
- The donor must fill out a Gift Aid declaration, giving the charity permission to claim it (more details on this below).
- The amount of income or capital gains tax paid by the donor in that financial year cannot be lower than the amount the charity is claiming in Gift Aid from that same donor.
- Gift Aid donations cannot be made on behalf of another person or company (although companies can claim tax relief on the donation if they donate directly).
Gift Aid Declarations
It’s crucial that charities make sure donors fill out a Gift Aid Declarations form that meets the criteria set by HMRC. As of April 2016 the wording on Gift Aid Declaration forms has changed so charities will need to make sure all their forms are now using the new wording if they wish to continue claiming Gift Aid.
It’s worth noting that donors do not need to fill out a Gift Aid declaration if they have donated £20 or less in cash. The only caveat to this is that the total claimed in this way does not exceed ten times that claimed by the charity in total Gift Aid. So if the charity has claimed £100 through declared Gift Aid donations, then they may not claim more than £1,000 in undeclared small cash donations.
About the Author: Nick Brown has been a chartered accountant since 1983 and a partner at Plummer Parsons since 1990, where he is also Head of Charity Audits and Payroll. As well as being a member of the Information Technology Faculty of the Institute of Chartered Accountants, Nick is also an expert on the charity and not for profit sector, holding a diploma in Charity Accounting. You can connect with Plummer Parsons on Twitter, Facebook or LinkedIn.