In this final article on the fundamentals of tax relief for charitable donations, I am going to start with a reminder that Gift Aid donations can be treated as being paid in the previous tax year if the taxpayer paid enough tax that year to cover both any Gift Aid donations he made that year and the ones that are to be backdated.
A request to carry back the donation must be made before or at the same time as the self-assessment tax return for the previous year is completed but no later than the filing deadline for the tax return, which is October 31 if you file a paper tax return or January 31 if you file online. If you do not complete a tax return you can ask your tax office to send you a form P810 Tax Review – you must send this by no later than January 31 after the end of the tax year to which you want to carry back your gift.
It is important to consider the effect of a Gift Aid donation on the age-related personal allowance (while it is still with us), age-related married couple’s allowance and tax credit claims.
If you claim the age-related personal allowance, married couple’s allowance or tax credits, it is important to let HM Revenue & Customs know about any Gift Aid donations. HMRC will subtract the amount you donate plus the basic-rate tax (that is, the grossed-up donation) from your total income and use the reduced figure to work out the value of your allowances or tax credits, if your income was above the relevant “income limit” that applies.
For higher-rate taxpayers with adjusted net income (ANI) above £100,000 (the level above which the personal allowance is reduced by £1 for every £2 of income above this limit) making charitable donations under Gift Aid represents a way of reducing ANI so as to avoid the reduction of the personal allowance.
This is also possible for carried-back Gift Aid donations. However, for this to work, the election to carry back the donation must be made on or before the date on which a tax return is delivered for the tax year immediately preceding that in which the donation is made, that is, the one to which the contribution is to be carried back.
Taxpayers must keep a record of the total amount of Gift Aid donations for each tax year and to let HMRC know about Gift Aid donations if:
- The age-related personal allowance, married couple’s allowance or tax credits are claimed
- You pay higher-rate tax
- You want to carry back a Gift Aid donation
If your tax return is completed, you can tell HMRC about Gift Aid donations by completing the section on Gift Aid payments.
If a return is not completed, you can give the details on form P810 Tax Review – see earlier.
How about companies? Making charitable donations “from the company cheque-book” is not unheard of.
Companies (and unincorporated associations) can claim tax relief for qualifying donations paid to charities (bodies or trusts accepted as charities for UK tax purposes). Generally, relief for Gift Aid donations is available in the accounting period during which the donation is made, but there are special rules for companies wholly owned by charities.
Gift Aid donations made to charities by companies are paid gross and so, unlike the Gift Aid scheme for individuals, no tax is repayable to charities. For the charity, the donation is treated as potentially taxable income but is exempt from tax provided the donation is applied for charitable purposes.
Charities receiving Gift Aid donations from companies should keep sufficient accounting records of such donations received, so they can identify these in their accounts and tax return.
When a company makes a qualifying donation to a charity, the amount paid can be set against profits for corporation tax purposes. The company can make a claim in its corporation tax self-assessment (CTSA) return to set the amount of the donation against its taxable profits, to the extent that it reduces the chargeable profit to nil.
Charitable donations cannot be used to create or add to a company’s trading losses, nor can excess charitable donations be carried forward or back, although they may be surrendered as group relief.
The donor company should keep normal accounting records to support entries on its CTSA return along with any other relevant documentation, for example, correspondence with the charity in relation to the donation such as a thank you letter.
Gift Aid relief for donations made by companies only applies to payments which are “qualifying charitable donations”. A qualifying charitable donation is a donation to a charity consisting of a payment of a sum of money but a payment is not a qualifying donation if:
- It is a dividend or distribution of profits
- It is made subject to a condition as to repayment
- The company or a connected person receives a benefit which exceeds the “relevant value” in relation to the payment
- It is conditional on or part of an arrangement involving the charity acquiring property (other than as a gift) from the company or a connected person
- It is made by a charity
Charitable donations and tax relief on them is a subject sure to generate relatively high publicity during the consultation on the proposed cap on tax relief. Given this, having an awareness of how the current rules for tax relief on charitable donations will do no harm.