Restrictions on Gift Aid for donations to charities.

There are anti-avoidance rules in place to prevent tax relief being given on donations to charities where the rules are being abused by individuals, companies and/or connected persons.

Company donations

As a reminder, a payment is not a qualifying donation for a company if:

1. It is a dividend or distribution of profits (except in the case of subsidiaries wholly owned by a charity)
2. It is made subject to a condition as to repayment
3. The company or a connected person receives a benefit which exceeds the ‘relevant value’ in relation to the payment
4. It is made by a charity or community amateur sports clubs
5. It is conditional on the charity acquiring property that has not been gifted to them
6. It is part of an arrangement whereby the charity acquires property that has not been gifted to them.

Individual donations

For an individual to have a qualifying donation the following conditions must be met:

1. The gift takes the form of a payment of a sum of money.
2. The payment is not subject to any condition as to repayment.
3. The payment is not a sum under a payroll deduction scheme.
4. The payment is not deductible in calculating the individual’s income from any source.
5. The payment is not conditional on, associated with or part of an arrangement involving, the acquisition of property by the charity from the individual or a person connected with the individual.
6. The payment is not by way of, and does not amount in substance to, waiver by the individual of entitlement to sums (whether of principal or return) due to the individual from the charity in respect of an amount advanced to the charity, and in respect of which a person, whether or not the individual, has obtained relief for social investments.
7. There are no benefits associated with the gift, or there are benefits associated with the gift but the restrictions on those benefits are not breached.

HMRC give an example in their guidance on a Tribunal case which looked at the last two points. John Harvey & Anor v The Commissioners for HMRC – UKFTT 1098, considered the application of the rules on a donation made by an individual.

This donation was then used to fund a loan to a party connected to the individual. The act of making the loan was enough to fail conditions 5 and 7 above.

The judge found that:

• By entering into the loan arrangement, the charity acquired property from the borrower (initially the rights to repayment and then the actual cash being repaid).
• The benefit arising to the borrower in such an arrangement is equivalent to the full amount loaned.
• Conditions 5 and 7 above had not been met and the original donation did not qualify for Gift-Aid relief.

Summary

Charity law does not prevent trustees entering into transactions with entities connected to donors, but care needs to be taken, particularly when donors and trustees are closely connected.

Next Steps

Please get in contact with us to understand how these rules could impact your charity.

Please note that this content is not intended to give specific technical advice. It is designed to highlight some of the key changes rather than provide an exhaustive explanation of the topics. Professional advice should always be sought before action is either taken or refrained from as a result of information contained herein.

About the author

Judith Pederzolli

Judith joined PEM in 2001 and specialises in the property and not for profit sectors. Judith is primarily involved in tax advisory Read more about this author …