With news of the credit crunch biting harder every day donors’ disposable incomes are falling and support for charities is coming under increased pressure. This means that charities must work harder and smarter to maintain their income; but taking full advantage of gift aid and avoiding fundraising tax pitfalls is essential.
Gift aid is probably the most generous tax relief for money gifts to charities anywhere in the world. However, although charities claim some £750 million in gift aid repayments each year it has been estimated that they could claim an additional £700 million. There are, though, a number of ways in which gift aid can be utilised in addition to traditional cash collections and sponsored walks.
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Provided that the value of any benefits provided to members as a result of their subscription is within the relevant limits membership/friends’ subscriptions can be gift aided. In this context newsletters and other publications provided to members giving details of the charity’s work are deemed to have no value even though they may have a cover price.
Discounts, vouchers for stores etc. provided to members are, however, a particular problem as these are a benefit which can easily take the value of donor benefits over the prescribed limit. While the provision of discounts need not be fatal to a claim they do make life much more difficult.
With longstanding schemes once the paperwork is in place claims can be made going back for up to six years leading to a substantial windfall – in one case £1million by a single charity.
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It is possible to arrange gala events so that gift aid can be obtained. This involves pricing tickets at a level to cover the cost of the event and then requesting a donation at a suggested level. This effectively splits the donation and the benefit into separate items. A ticket price including a donation, or a ticket plus a required donation, if a supporter is to attend is not permitted.
Clearly, this approach involves some risk as the charity needs to know their supporters and be confident that they will make the suggested donations as admission can not be refused if a supporter gives less than the suggested amount. It is vital to obtain professional advice before promoting an event on this basis as the detailed arrangements are crucial. It is also advisable to obtain HMRC agreement to the proposals for each event.
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A payment for an item at a charity auction is not a gift to a charity. However, people bidding at a charity auction often intentionally pay more than the item is worth in order to support the charity.
It is possible to make use of gift aid at charity auctions by splitting the amount paid for the lot into the market value of the item and a donation.
This is, however, only possible for items that are commercially available and where a clear retail market value can be established. Celebrity items such as signed football shirts, guitars, gold discs etc are not commercially available on the High Street and so the market value of these items will be the amount bid. This means that there is no excess to gift aid.
Advance planning is crucial to successfully using this technique. Gift aid able items need to be identified, all of the paperwork needs to be set up before the event and, crucially, those helping at the event in particular the auctioneer need to be properly briefed. HMRC agreement to the proposals for each event is also advisable.
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While only donations in cash made by individuals can be gift aided, a number of charities have recently begun to operate a scheme whereby the charity sells the goods as agent for the supporter who then donates the proceeds under gift aid. The scheme can seem complex and, for technical reasons, needs to be operated through a subsidiary rather than the charity. There are various record-keeping requirements, the subsidiary must bear the costs of selling the goods and be funded correctly but substantial additional sums can be raised in this way.
Although the major national charities have led the way in developing this technique it can easily be used by small charities with only a few shops.
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There is a popular misconception that charities have a blanket exemption from tax. The reality is that there is a complex series of very specific exemptions within which charities must operate if a tax liability is not to arise. In particular, trading activities are only exempt from tax if the activities are carried out in the actual performance of the charity’s objects. Fundraising itself is not a charitable activity and it is, therefore, quite easy for fundraising events, and in particular commercial sponsorship, to be treated as a taxable trading activity.
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By concession, certain fundraising events arranged by charities will not be treated as a taxable trading activity provided the event qualifies for VAT exemption and the profits are applied for charitable purposes. Most of the common fundraising events such as balls, concerts, quizzes, dinners, firework displays etc. qualify for exemption.
While there is no limit on the amount which maybe raised by an event (even an Elton John concert has qualified), relief is limited to a maximum of 15 events of the same kind held, by the charity and any trading subsidiary, at the same location in any year. If 16 or more events of the same kind are held at the same location none of the events qualify for the exemption.
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Commercial sponsorship of an event can make a huge difference to the amount raised. It can, though, give rise to tax problems as whether the sponsorship amounts to a taxable trading activity by the charity will depend upon the exact nature of the arrangement.
The fact that a sponsor generates good publicity or public relations from its involvement with a charity does not automatically mean that payments by the sponsor are taxable income in the hands of the charity. If the charity does not provide goods or services in return for payment the sponsorship will normally be regarded as a charitable donation. The fact that the sponsor takes steps to publicise their association with the charity will not affect this unless the charity also publicises the relationship. Commonly a charity will publicise their relationship with the sponsor by including references to the sponsor in publications, posters etc. at the sponsored event. Provided that such references amount to no more than an acknowledgement of the sponsor’s contribution the arrangement will not normally be regarded as trading.
Problems will, however, arise where the charity provides advertisements, such as large or prominent display of the sponsor’s logo or corporate identity, or services such as use of the charity’s mailing list, endorsement of the sponsor’s products and services, or links to the sponsor’s sales website from the charity’s own website.
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Sponsored events are a routine way for a charity to utilise gift aid, but not all payments will qualify. For many events charities charge a small entrance fee to cover administration costs, refreshments and a souvenir t-shirt. Given the benefit rules it is unlikely that these will qualify for gift aid. However, sponsorship raised by the participators will, provided that valid gift aid declarations are obtained from sponsors.
Special care is needed with adventure events and events in exotic places, for example, sponsored treks along the Great Wall of China, ski-diving etc. where the charity requires a minimum amount of sponsorship to be raised and then meets the cost of participation. These events can cause problems with the benefit rules as many participants raise sponsorship from family members who are connected to the participant and deemed to receive any benefit received by the participant. Their donations may not qualify for gift aid and a special gift aid form is needed so that they can be identified.