Tax is never simple but some small charities can get some ‘free’ money

Following consultation, the Small Charitable Donations Act 2012 (SCDA 2012) became law in December 2012. The scheme is referred to in all official documents as the 'Gift Aid Small Donations Scheme' or GASDS and it may well be that you have charity clients that may benefit.

The scheme, which commences on 6 April 2013, provides that an eligible charity can claim a top-up payment in respect of small cash donations received in a tax year provided that it has made a successful Gift Aid claim for donations received in the same year. The basic maximum for the claim will be donations totalling £5,000, making the top-up payment £1,250 at the current basic rate of income tax.

There are provisions which:

increase the maximum claim where a charity carries out activities in a community building; and

divide the basic maximum where charities are connected.

The legislation is very detailed and reflects HMRC's concern that unscrupulous individuals may set up charities simply for the purpose of obtaining a top-up payment.

Small donations

The basic premise is that a small donation will be a cash donation of £20 or less. It can be in notes or coins and in any currency. Where the managers of the charity do not know if the gift was £20 or less they should take reasonable steps to find out. In addition:

only donations collected in the UK can qualify, so charities which may raise cash gifts overseas cannot claim in respect of those donations;

the cash donations must be deposited in the UK in an account maintained by the charity at a relevant institution as defined by s109(3) Charities Act 2011;

a donation is outside of the scheme if it is eligible for Gift Aid, it is made under the payroll giving rules or is deductible in calculating the individual's income;

the payment must be a genuine gift and cannot be a loan or have a requirement that the charity must acquire property from the donor;

there must be no benefit other than a negligible one, such as a lapel sticker;

membership fees are specifically excluded from the definition of small donation; and

the charity must also satisfy the condition that the donation has been applied for charitable purposes.

Calculating the amount of the top-up payment

The basic top-up payment is calculated using the formula:

SD x R/(100-R)

where:

SD is the amount of small donations received in the year; and

R is the basic rate of income tax for the year. s1(2) SCDA 2012

Based on the current rate of tax of 20%, the top-up will be £25 for each £100 of small donations.

The legislation then sets a maximum figure for the claim by reference to the lower of two amounts:

ten times the amount on which Gift Aid is claimed in respect of qualifying donations made to the charity in the tax year concerned; and

£5,000.

This effectively sets the maximum amount of the claim at £1,250.

The maximum amount is subject to adjustment where charities are connected or where activities are carried out in community buildings.

Meaning of 'eligible charity'

A charity can only make a claim under GASDS if it is an 'eligible charity'. This has two key elements to it:

a Gift Aid compliance history that satisfies the legislation; and

it is not a new charity.

Gift Aid compliance history

This is a fundamental requirement because it demonstrates to HMRC that the charity has a track record of tax compliance and can be trusted to operate the new scheme. It could also be the reason why many small charities which might have expected to benefit from GASDS will not be able to do so, at least in its early years.

There are two basic requirements which must be fulfilled:

the charity must have made a successful Gift Aid claim in at least two of the previous four tax years; and

it must not have failed to make claims for two consecutive years, otherwise claims made in an earlier year will be disregarded.

Successful Gift Aid claim

The requirement is not just that a claim has been made but that it leads to a tax exemption for the donations. The wording in the legislation states that a claim will be 'successful' if an amount falls to be exempt. This presumably means that if part of a Gift Aid claim was challenged by HMRC because, for example, the relevant declaration was found to be invalid, the claim would still be regarded as successful because some amount would qualify. Clearly, if the entire claim failed, it could not be successful.

The penalty sin-bin

The legislation does make clear that if a charity has had a penalty imposed by HMRC on either a Gift Aid claim or a top-up claim, then it will not be regarded as an eligible charity for the tax year of the claim and the following tax year.

The reference to penalties and claims applies to situations which arose before the Act came into force e.g. a charity that had a penalty imposed on its claim for Gift Aid in 2012/13 would not be able to make a claim under GASDS in 2013/14.

New charities

The second requirement to be an eligible charity in a particular tax year is that the charity's start-up period expired before that year. This is defined as:

'the first period of two consecutive tax years during which it is, at all times, a charity (within Part 1 Sch 6 FA 2010 (the basic definition of a charity for tax purposes).

So, the charity must have been in existence for a period which covers at least two complete tax years. In order to immediately qualify for GASDS a charity must have been in existence since before 6 April 2011 so that the years 2011/12 and 2012/13 satisfy the start-up condition.

Tax is never simple but some small charities can get some 'free' money - help them not to miss out.