Hard-pressed charities facing the ‘double whammy’ of a drop in donations and the increase in VAT to 20% next year will rely more than ever on donors ensuring that they use Gift Aid, says ACCA (the Association of Chartered Certified Accountants).
Charities which use donations to buy items for the groups or individuals they help are liable for Value Added Tax (VAT) on those goods. With VAT rising from 17.5% to 20% next year, any donations will buy less – unless more donors use Gift Aid, which makes their donation worth more to the charities.
Chas Roy-Chowdhury, head of tax at ACCA, says: “Charities are facing a growing tax burden, at a time when they have warned that they are losing out on donations because people are being more cautious with their money. So those who donate to charities need to remember to use Gift Aid.”
Gift Aid works by allowing charities to reclaim the basic rate tax from HM Revenue & Customs (HMRC) on its ‘gross’ equivalent – the amount before basic rate tax was deducted. Currently, charities are able to claim an additional 28% on any donations using Gift Aid for basic tax payers – and people paying the higher 40 % or 50% tax rates can claim more relief through their Self-Assessment tax return. This means a basic taxpayer who makes a donation of £10 to a charity, will enable the charity to claim back an additional £2.80 from the Government if they use Gift Aid.
Chas Roy Chowdhury says: “There are other ways for donors to help both charities and their own tax status. Payroll giving is an option because it allows people to make donations directly from their pay, or from their company or personal pensions. It also means that tax relief is applied on the donation immediately – and at the highest rate of tax. So if you are a higher rate tax payer at 40 per cent, and authorise a monthly donation of £10, you will get a 40% tax relief – or a saving of £4, so the actual cost to the donor is £6.”
“Given the lengths people will go to in order to raise money for charities, it is surprising that many do not take the relatively easy steps to help charities make the most of that money- and to benefit themselves from tax relief in the process,” said Chas Roy-Chowdhury.
It is now even more important for charities to consider VAT registration. The current rate of 17.5% will rise to 20% from 4th January 2011 charities need to consider whether they should register. They may be able to recover significant amounts relating to telephones and IT equipment, for example.
Chas Roy-Chowdhury says: “Registering for VAT is a decision which should not be taken lightly as it is likely to result in complexity and form filling especially as the charity will most probably become what is known as ‘partially exempt’. But it could bring in a significant amount of VAT particularly where the charity undertakes some form of trading activity.”
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For further information, please contact:
Chas Roy-Chowdhury, ACCA Head of Taxation
+ 44 (0)20 7059 5976
+ 44 (0) 7710 707516
e mail: email@example.com
Hannah Smith, Ruder Finn UK
+44 (0)20 7462 8949
+44 (0)7740 350403
e mail: firstname.lastname@example.org