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Thursday, 25th April 2024 |
| Relief for the charitable |
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| The Finance Act has made substantial changes to tax reliefs for voluntary donations. New conditions must be met to obtain relief, new mechanisms exist to deliver the relief, and the limits to relief. |
Prior to the Finance Act 2001 there were approximately a dozen sections of the Taxes Acts which gave tax relief in respect of selected types of charitable donations. Very broadly speaking, companies could get tax relief on donations to charitable bodies where the donation did not exceed ?10,000 per annum. Individuals could obtain income tax relief for donations to charitable bodies only if the charity were an overseas charity. That broad picture was complicated by special reliefs available in respect of specific charities, and also in respect of reliefs for gifts to bodies associated with education, but not necessarily charitable.
Slate wiped almost clean
The Finance Act 2001 has abolished most of the previous reliefs. The principal remaining relief is the covenants relief. The Finance Act has put a single code of relief in place of the abolished reliefs. The new relieving code has the following features:
• Only bodies specified in the Act, or specifically approved by the Revenue as charities will attract the new relief in relation to donations. All who have existing Revenue approval as charities retain that approval. Bodies being newly set up as charities will require Revenue approval before donations to them will attract relief.
• Only charities which have been in existence for at least three years attract the new relief. It is not uncommon in the wake of disasters for people to set up a charitable trust specifically to provide relief to victims of the disaster. Such trusts will find that donations to them do not attract relief under the new code.
• There is no upper limit to the amount of a donation that may attract relief. However there is a minimum limit - ?200 from any one person to any one charity over the course of a year. This minimum amount can be met by one or several separate payments within the year.
In the past most relief was capped at a donation of ?10,000 per taxpayer. We are now closer to the American situation where a donation of millions may be made, with tax relief available. However, as described below, the practical ability to avail of tax relief, by having taxable income against which to offset the relief, may vary as between a company, an individual liable to self-assessment, and an individual not liable to a self-assessment (typically in the PAYE system).
• Where a tax relieved donation is made by a company, the company is treated as incurring either a trading expense or a management expense (as appropriate to the activities carried on by the company). If the result of the donation being treated as a trading expense is to create a loss for tax purposes, that loss can be carried forward for relief against the income of a future period.
Similar treatment arises where the donation is treated as a management expense ie relief may be available in a later period, if there are not sufficient profits in the current period.
Where the company claims the donation as a trading expense, any trading loss it may thus create in most cases will not be available for offset against other income of the company in the same period, or against capital gains of the company in that period. This is due to other restrictions in the Finance Act on the use of trading losses.
• Where an individual is liable to tax under self-assessment (very broadly speaking a self employed person) the individual will receive relief against all of his income of that year. He will not be able to offset the donation against capital gains tax. If the relief for the donation exceeds his taxable income for the year, he will not be able to carry forward the excess for relief in a later year.
A donation by an individual who is not liable to self-assessment (typically a person paying their tax almost entirely under the PAYE system) is treated differently. Strictly speaking the individual does not receive any tax relief for his donation. Instead, an additional payment will be paid by the State to the charity. That amount would be equal to the tax relief which the individual would have got, had he been treated in the same manner as an individual taxable under self assessment and had the donation paid been grossed up for the amount.
Example:
John Brown is a self-assessment individual. He makes a qualifying payment to a charity of ?1,000. He will receive tax relief of ?420, assuming he has at least ?1,000 of income taxable at the 42 per cent rate.
Joe Smith also has ?1,000 of income taxable at the 42 per cent rate but he does not pay tax under the self-assessment system. Joe pays ?580 to a charity. The charity will receive payment from the State of ?420, but Joe will not receive tax relief for the payment.
Both John and Joe have enabled the charity to be better off by ?1,000 at the same net cost to each of them i.e. ?580 in the example above.
Payments by any person to a charity must amount to at least ?200 in a year to qualify for the relief.
Education
One of the most important aspects of the new relief is that it extends to primary, secondary, and third level educational establishments approved by the Minister. Hitherto parents wishing to make donations in a tax efficient form to schools attended by their children usually had to use the covenants route. That remains available. However the new relief is less cumbersome and enables lump sum donations to be made, rather than donations over a lengthy period. |
John Bradley is a Director in KPMG.
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| Article appeared in the April 2001 issue.
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