UK households making generous charitable donations are being caught in a "harsh" tax trap by HM Revenue and Customs (HMRC), a leading tax expert has warned.
The Gift Aid Pitfall Explained
Writing in The Telegraph, former tax director Mike Warburton has highlighted a critical issue with the Gift Aid system. This scheme allows charities to reclaim 25p for every £1 donated, provided the donor has paid enough Income Tax or Capital Gains Tax in that tax year to cover the claim. Around half of all UK households donate to charity annually, a figure that rises to 90% when other forms of giving are included, making the rules widely relevant.
Mr Warburton identified two major traps for donors. The first arises if an individual makes a Gift Aid donation but has not paid sufficient tax in that year to match the charity's reclaim. This can result in an unexpected personal tax bill from HMRC. While donors can offset Capital Gains Tax as well as Income Tax, and can carry back a Gift Aid payment to the previous tax year if beneficial, this must be claimed before the 31 January online tax return deadline.
A 'Particularly Harsh' Legislative Trap
The second, and more severe, trap concerns this carry-back claim. "The carry-back claim has to be made in the first tax return you submit," Warburton cautioned. He illustrated the point with a case where a man, after his wife's death, donated £400,000 to charity and later sought to double it with another £400,000. Both of the additional payments were disallowed by HMRC because he had already submitted his original tax return containing the carry-back election.
"I have no idea why the legislation is framed in this particularly harsh way, which can so easily catch out those who simply want to help others in need," Warburton stated. "This law should be changed."
Key Deadlines and Declarations
To claim Gift Aid, donors must provide a declaration to the charity or Community Amateur Sports Club (CASC), giving it permission to reclaim the tax. The organisation must also be officially recognised as a charity or CASC.
The critical takeaway for donors is the importance of timing and tax liability. Warburton's warning serves as a crucial reminder for generous individuals to:
- Ensure their annual tax payments cover their Gift Aid donations.
- Make any carry-back claims before the 31 January deadline.
- Include all intended carry-back claims in their very first submitted tax return for the year.
With the system posing such risks to well-intentioned donors, calls for legislative reform are growing to prevent further punitive outcomes for charitable giving.
