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UK Shelves Gift Aid Reforms

Thursday, February 11, 2010

The UK Treasury has deferred plans for reform of the tax rules surrounding charitable giving until well after the forthcoming general election, it has emerged.

Charities had been hoping that the government would soon set out proposals for a shake-up of the Gift Aid system, which is often criticized for its complexity and low take up. But at the first meeting of the Gift Aid Forum, which was recently set up to enable charities and the government to discuss tax and other issues regarding charitable giving, Ian Pearson, economic secretary to the Treasury, said that new proposals will not be finalized until September 30.

While charities have welcomed the government's intention to address the problems inherent in the Gift Aid system, several senior figures from the charitable sector have expressed dismay at the lack of progress and the continued uncertainty with regards the rules, especially given the fact that the upcoming general election, expected in May, could result in a change of government.

Last August, the Institute of Fundraising presented detailed proposals to the Treasury on reforming the Gift Aid scheme for higher rate taxpayers, which would allow them to donate the full amount of tax relief which they are eligible to reclaim back to charities.

Under the Gift Aid scheme, charities can reclaim basic rate tax (20%) from HM Revenue and Customs on the donation’s "gross" equivalent – the amount before basic rate tax was deducted. This means that GBP10 donated using Gift Aid is worth GBP12.50 to the charity.

Higher rate taxpayers can claim the difference between the higher rate of tax (40%) and the basic rate of tax on the gross value of the charitable donation. Therefore a donation of GBP100 would result in the charity receiving GBP125, allowing the taxpayer to claim back 20% of GBP25 on their self-assessment return. However, according to the Institute, while most higher rate taxpayers believe they can reclaim the difference between the basic and higher rates of tax for themselves, in practice the government keeps 40% of this sum for itself.

“As even this can only be reclaimed by the minority of donors who complete a self-assessment form, very few people claim back higher rate tax relief on anything but the largest donations,” the Institute said.

A Treasury report on the Gift Aid system in December suggested the possibility of a 'composite rate' allowing charities to claim the same rate of refunds for basic and higher rate taxpayers. This is something the main opposition Conservative Party are also exploring.

However, Conservative charities spokesman Nick Hurd told a recent Institute of Fundraising conference that while a Tory government would seek to make the Gift Aid system less bureaucratic, the party has not yet decided if a whole new approach to philanthropy is needed in Britain.