What is Gift Aid?
The Gift Aid scheme is a UK government scheme designed to encourage individuals to donate to charities by granting tax relief (both to the charity and the donor) on donations of money.
Broadly, the scheme works by deeming Gift Aid payments to be made net of 20% basic rate tax, irrespective of the donor’s income level and marginal tax rate. The charity is able to claim back 20% tax from HMRC, i.e. on a donation of £800 to charity, the charity can claim back £200 from HMRC meaning the charity receives £1,000 in total.
For an individual to make a Gift Aid declaration for a donation, that individual must pay sufficient UK tax in the tax year of donation to cover the amount of tax that the charity will reclaim from HMRC. Where this is not the case, HMRC will charge the donor with income tax equivalent to the amount of any shortfall (rates will depend on donor’s marginal tax rate).
For more information please visit, https://www.gov.uk/donating-to-charity/gift-aid or contact HMRC.
What are the likely UK tax implications of the Covid-19 Debenture Donation Campaign for Debenture Holders?
Please note that this advice is generic in nature and is not specific to the personal circumstances of individual Debenture Holders and we are not aware of certain personal information (such as residence and domicile) or specific circumstances which would be required in order to give advice.
Each Debenture Holder should consider consulting his/her own advisors in relation to the COVID-19 Debenture Donation Campaign.
Basic rate taxpayers
If you are a basic rate taxpayer, you should ensure that you have paid sufficient income tax and/or capital gains tax to cover the Gift Aid that the charity will claim back from HMRC. If you have paid sufficient tax then there should be no further tax to pay as a result of the donation. If you are unsure of your tax position you should speak to a tax advisor or HMRC.
Rob is a basic rate taxpayer and he makes a cash donation of £2,000 to the RFF. The RFF is able to claim Gift Aid of £500 from HMRC which makes the gross donation £2,500.
Rob must ensure that he has paid at least £500 in tax during the year, e.g. tax deducted at source on salary or pensions, tax payable on investment income, rental income or capital gains tax payable on disposal of assets.
Higher and Additional rate taxpayers
Higher and additional rate taxpayers must also ensure that they have paid sufficient income tax and/or capital gains tax to cover the Gift Aid that the charity will claim back from HMRC.
However, in addition, higher and additional rate taxpayers can also claim income tax relief (the difference between the basic rate tax and their marginal rate) through their Self-Assessment tax return or by contacting HMRC to ask them to amend their PAYE tax code.
Harriet is a higher rate taxpayer (paying tax at 40%) and Jamal is an additional rate taxpayer (paying tax at 45%). They both make a cash donation of £2,000 to RFF and RFF is able to claim Gift Aid of £1,000 from HMRC which makes the gross donation £2,500 each.
Harriet can also claim back £500 (£2,500 x (40-20)%) through income tax relief through her tax return. This has the effect of more income being taxed at 20% rather than 40%.
Jamal can also claim back £625 (£2,500 x (45-20)%) through income tax relief through his tax return. This has the effect of more income being taxed at 20% rather than 45%.
Charitable donations relief conditions for UK companies
In order for a UK corporate entity to claim relief for any charitable donations, that company must not itself be a charity. There are also special rules if the donor company is itself wholly owned by one or more charities.
The donor company obtains relief by deducting the qualifying charitable donation in its UK corporation tax return in the accounting period in which it makes the gift. Please note that the relief can only be claimed against taxable profits in the same year and cannot be carried forward to a future year.
Assuming that the donor company has recorded a Debenture Loan as a financial asset on its balance sheet at cost, any amounts released (being the cost in excess of its present day value), and as a result released to the profit and loss account, should be a deductible expense for UK corporation tax purposes.
The donor company should consider seeking advice before entering into the Covid-19 Debenture Donation Campaign.
Scrum Limited is a private limited company incorporated and tax resident in the UK. It holds a £10,000 Debenture Loan and this is recorded as a financial asset at cost on its balance sheet. Scrum Limited offers its Debenture Loan to the RFU for £2,000 and agrees to donate these proceeds to the RFF. The RFU accepts Scrum Limited’s offer and it transfers these funds directly to the RFF.
Scrum Limited derecognises the £10,000 financial asset from its balance sheet, and records a £2,000 charitable donation expense and a £8,000 loan write down expense in its profit and loss account. Provided that the company has taxable profits in the year, the above expenses should result in a UK corporation tax credit of £1,900 (£10,000 x 19%).