Your client may qualify for Gift Aid under Chapter 2 Part 8 Income Tax Act 2007 (ITA 2007), if they have made a qualifying donation to a charity or a body which is treated as a charity. A charity is defined by Schedule 6 Finance Act 2010 but is extended by s.430 ITA 2007 to include other entities such as CASCs.
For your client’s donation to qualify for income tax relief, it has to be a qualifying donation- a definition which can be found at s.416 ITA 2007. Broadly, a qualifying donation must meet the following requirements:
• it is the payment of a sum of money;
• it is not subject to any condition as to repayment;
• it is not made under a payroll-deduction scheme;
• it is not deductible in calculating the individual’s income from any source;
• it is not conditional on, or associated with, the charity’s acquisition of property from the individual or a person connected with the individual;
• it is not by way of waiver of the individual’s entitlement to sums due to the individual from the charity in respect of an amount advanced to the charity and in respect of which a person has obtained relief under ITA 2007, Pt. 5B (social investments); and
• no benefits are associated with the donation or, if there are, they are within certain limits which are prescribed in s.418 ITA 2007. HMRC’s detailed guidance on the limits can be found from Chapters 3.20 to 3.23- found here.
In respect of the final condition, a benefit is associated with a donation if it is received by the donor or a person connected with the donor (s.417 ITA 2007). A person connected with the donor includes the donor’s spouse or civil partner, a relative (such as a sibling and their spouses or civil partners), ancestor or lineal descendent and company under the donor’s control or under the control of the persons connected to the donor.
An additional requirement of s.416 ITA is that the donor must give the charity a valid Gift Aid declaration as defined in s.428 ITA 2007. Regulations SI 2000/2074 (Regulation 4) prescribe the manner in which declarations should be given and the information and statements they should contain. An appropriate declaration must contain the following:
a) contain the name and home address of the donor,
b) name the charity (or be made in circumstances where the charity is identified),
c) identify the gift or gifts to which the declaration relates, and
d) confirm that the identified gift or gifts are to be qualifying donations for the purposes of section 25 of the Finance Act 1990 (Donations to charity by individuals).
On the assumption that this is a qualifying donation, relief is given by treating the donation having been paid after deduction of basic-rate tax. Your client’s basic-rate and higher rate limit is then increased by the amount of the donation grossed up at the basic rate for the year in which it is made. For example, if your client paid £1,000 to the charity in the tax year 2022/23, then the charity will be able to reclaim back £250 from HMRC. The extension to the basic rate limit is ignored for the purposes of calculating top slicing relief on gains on life policies- s.535(7) ITTOIA 2005.
If your client is a basic rate taxpayer, they will not receive any further tax relief on their donation.
If your client made the donation in 2023/24 tax year, then generally relief would be given in that year. However, on making an election and meeting some conditions, the individual may treat the donation as having been made in the 2022/23 tax year (s.426 ITA 2007).
Your client can elect to treat the donation as having been made in the previous tax year, provided that their ‘charged amount’ of income and capital gains for the 2022/23 is greater than, or at least equal to, the ‘increased total of gifts’.
The charged amount of income and capital gains is defined in s.427 ITA 2007 and is the aggregate of the individual’s “modified net income” (defined in s.1025 ITA 2007) for the 2022/23 year and chargeable gains for the tax year 2022/23.
Modified net income is the income as calculated at Steps 1 and 2 of s.23 ITA 2007 but ignoring, non-qualifying income (s.1026 ITA 2007), trade losses carried back, annual payments, adjustments required to profits as a result of farmers’ and artists averaging, claims to carry back post- cessation receipts and any reliefs or adjustments arising from making a claim for farmers’ and artists averaging.
A definition of increased total of gifts is given by legislation at s.426(4) ITA 2007. This is the aggregate of:
• the grossed-up amount of the qualifying donations being carried back to the previous year under that election or any other election (whether made at the same time or earlier); and
• the grossed-up amount of the qualifying donations made in that previous year which have not themselves been carried back to an earlier year.
In cases where the basic rate in the previous year differs from that of the year of payment, the amounts carried back are, for this purpose, to be grossed up at the basic rate for the previous year.
The election is time sensitive and will only be valid if made on or before the submission of the self-assessment return for that previous year (2022/23) and, in this case, before 31 January 2024.
Finally, you should ensure that your client has paid enough income and capital gains tax for the tax year in which the qualifying donation is made (including the previous year if an election is made). The amount of income and capital gains tax must equal to or exceed the tax deemed to have deducted from the donation.
If the client’s liability for the year or if an election is made for the previous year is less than the total tax deemed from qualifying donation, there is a recovery of the tax deemed to have been deducted (s.423 ITA 2007). In other words, this will increase your client’s tax liability.
Initially the clawback works is by restricting the donor’s entitlement to certain personal reliefs as far as is necessary to increase the liability so that it equals the deemed tax deductions. The personal reliefs that are restricted include, personal allowance, the married couple’s allowance, the blind’s person allowance and payments to trade unions and police organisations.
If after restricting the personal reliefs there is still a shortfall, then this shortfall will be added to your client’s income tax liability for the tax year concerned.
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