Blog

4 October 2018, 12:57

Gift Aid - restriction on associated benefits

Michael Godfrey, Assistant Director at PEM shares helpful insight for charities on Gift Aid and associated benefits

Gift Aid is a valuable source of income for many charities, so it is important to get the claims right. HMRC do carry out Gift Aid audits so charities should ensure their internal procedures allow them to be confident that their claims are correct.

When claiming Gift Aid charities should consider whether any benefits are being supplied to the donor and whether the value of those benefits will stop Gift Aid being available.

The basic principle of a gift is that it should be something that is freely given with nothing substantial received in return, and this stands true for a gift between an individual and a Charity.

The gift aid benefit rules have been around for a number of years now and are largely unchanged since their inception. However, following consultation and as part of the drive to make tax ‘simpler’, the government are bringing changes to the value thresholds for benefits given to donors, which are used in determining whether or not gift aid can be claimed. These new rules will apply from April next year. The changes are not as wide ranging as some had hoped but will make life a little easier for charities.

What is a benefit?

When, as a charity, you provide a benefit to a donor, and that benefit is associated with a donation that has been made, the associated benefit rules must be considered.

But what is a ‘benefit’? It’s something given to a donor in return for making a donation and is not trivial and has some measurable value. This could be a variety of things, such as a thank you gift (such as a key ring or sticker), tickets to an exhibition or a drinks reception at a performance.

Examples of trivial benefits or those with no value, would be newsletters and other literature sent to donors and stickers and badges. Some benefits can be hard to value and HMRC do provide examples of valuation methods for some specific scenarios.

Under the current rules, permissible benefits are those not exceeding:

1. 25% of the donation for donations up to £100
2. £25 for a donation up to £1,000, or
3. 5% of the total amount for any donation of more than £1,000

This is subject to a maximum benefit of £2,500 received in any tax year from any one charity

The changes increase the threshold for donations between £100 and £2,500.

For donations from 6 April 2019, benefits will be limited to:

1. 25% of any amount the donation not exceeding £100, plus
2. 5% of any amount above £100

The maximum benefit of £2,500 will still apply.

If the associated benefit rules are breached for any one donation, Gift Aid cannot be claimed on the donation.

Associated benefits and connected persons

One of the more complex areas in the associated benefits rules, and one often overlooked, are the rules for benefits received by connected persons.

Under the connected persons rules, a benefit is received by a donor not only if it is provided directly but also if provided to any “connected persons”, defined as:

• Spouse
• Sibling
• Civil Partner
• Ancestor
• Lineal descendent
• A spouse of a sibling, ancestor or lineal descendent
• A company under the control of the donor or a connected person

It is clear that the definition of a connected person is very wide ranging, and almost impossible and too onerous for a charity to track without considerable time and cost. However, fortunately a charity is not required by HMRC to keep track of these donations, but only make donors aware of the connected person’s rules.

Example

As a result of Mrs Charitable’s donation of £5,000 gift to a local theatre charity, they offer a thank you gift of two free tickets to the opening night of that year’s panto (which retails at £60). This gift is within the limit of a permissible benefit, so she is able to claim Gift Aid on her donation.

The next year, she makes the same £5,000 donation, but her husband also decides to make a donation of £10. Again, the theatre sends two tickets worth £60.

The calculation for Mrs Charitable’s donation is unchanged (£5,000 donation, £60 benefit), so she still receives a permissible benefit and the Charity can claim Gift Aid.

When considering whether Mr Charitable’s donation breeches the permissible benefit test, we must include his wife’s benefit of the tickets, as this is associated with his donation and they are connected. The maximum benefit he (or his wife) would be able to receive for his donation is £2.50.

Even though their donations when taken together more than cover the benefit they receive, he will not be able to claim Gift Aid on his donation.

PEM is an independent firm of Chartered Accountants and Tax Advisers based in Cambridge. Specialising in the charity and not for profit sector, PEM offers a full range of services from tax advice to audit and payroll. We act for local, regional and national charitable organisations, two thirds of the Cambridge University Colleges, science research institutions and independent schools.

Find out more about CFG's Gift Aid Awareness day #tickthebox campaign