Lost revenue?

The revenue benefits from lowering the basic tax rate. By Barry Gower

The recent announcement by the Chancellor about dropping the basic rate of tax to 20 per cent has caused great concern. Many charities and organisations such as the Institute of Fundraising are concerned about the amount of money charities are going to lose, and are considering petitions and lobbying in an attempt to reverse the decision.

But now that a little time has passed, let’s consider what has really been lost. Currently, charities are only collecting around 30 per cent of their gift aid, amounting to £650 million each year on donations of £7.7 billion. At a gift aid rate of 28 per cent, this represents £2.3 billion of gift aidable donations.

To maintain the status quo, charities would have to increase the amount on which they recover gift aid to £2.6 billion, which represents a recovery rate of around 33 per cent. Thus, in actual fact, charities only have to improve collection by 3 per cent and they are no worse off!

So, if they can improve collection by 10 per cent, they would have improved their overall position by 7 per cent. And before they start thinking of resting on their laurels, let me remind them that this still only represents a gift aid rate of return (GARR) recovery rate of 40 per cent. Looking at it another way, charities are currently throwing away two-thirds of the income that the taxman is offering them. That certainly merits a wake-up call.

However, there is also the other side of the basic rate of tax drop, and that is the effect for the higher rate tax payer. The gap is now raised from 18 per cent to 20 per cent, increasing the tax relief from 23 per cent to 25 per cent. This means that the higher rate tax payer who was previously getting tax relief of 23 per cent on his donation, can now get tax relief of 25 per cent. Best of all, from the viewpoint of the fundraiser, is that the taxman has made it possible for the higher rate tax payer to donate this tax relief directly to a charity through the self-assessment tax form (SA-100).

In pole position
So how does your school take advantage of this? Ensure that your school has registered with the HMRC for charitable giving through the SA tax return scheme. This allows higher rate tax payers to donate all, or part, of their tax relief to charity. You also need to make sure that your donor (or, better still, their accountant) has this registration number to fill in box 19A.3.

The tax form does not provide for the tax payer to identify the tax that he wishes to donate. It only allows him or her to stipulate all, or part, of their tax relief (as an amount, not as a fraction or percentage). So, if a higher rate tax payer elects to donate all of his or her tax relief, your school will get the tax back on all the donations, irrespective of which charity they were made to.

And it gets better! Because these are, effectively, cash donations, they can be made under gift aid – and the tax form actually includes the gift aid declaration. The higher rate tax payer can then get tax relief on this donation, which can then get donated through the self-assessment form, and so on…

So is dropping the rate a bad thing? Well, if it raises the profile of the efficiency of gift aid giving, while awakening an opportunity for higher rate tax payers (who are probably your larger donors) to give an additional amount (which they won’t miss) and the taxman does all the administration and foots the bill, I don’t see how it can be, do you?

Barry Gower is managing director of GAIN (gift aid recovery consultants). Barry can be contacted on bg@gain.me.uk or 020 8868 1307.

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