Gift Aid provides substantial tax incentives to individuals making gifts to charity. Under the Gift Aid regime, when making a gift to a charity the charity can claim back the basic rate of income tax meaning a donation of £100 is worth £125 to the charity. Higher rate taxpayers can claim back additional relief through their tax return.
Under section 416 of the Income Tax Act 2007 (the 'ITA 2007'), a donation will qualify for Gift Aid relief provided it is accompanied by a Gift Aid declaration and a number of other conditions are met.
The First-tier Tribunal case of Harvey v Revenue and Customers Commissioners held on 6 December 2024 provides a recent example where the court has determined the boundaries of what constitutes a qualifying donation under section 416 ITA 2007.
Harvey v Revenue and Customs Commissioners
The joint appellants in the case lost their appeal against discovery assessments and closure notices raised against them by HM Revenue and Customs which resulted in a substantial increase in their personal tax liabilities.
The first appellant made loans to a company he controlled, which then repaid the loans by reducing the first appellant's director's loan account when it could afford to do so. He also made significant donations to the second appellant charity, claiming them to be 'qualifying donations' for gift aid purposes under section 414 ITA 2007. The donations made to the charity were conditional on it making loans to the company, which the company repaid to the charity with interest.
HMRC disputed this arrangement and the assertion that the gifts were qualifying donations, as three of the six conditions laid out in section 416 ITA 2007 had not been met, meaning that no tax relief would be available to the first appellant.
The court agreed with HMRC's view in its judgment. Following the principle laid down in WT Ramsay Ltd v Inland Revenue Commissioners [1982] A.C. 300, it held that a 'real world' approach should be adopted to tax avoidance which entail a series of preparatory steps, and that the court should look at the greater scheme of tax avoidance as a whole to determine whether the donations in this instance qualified under ITA 2007.
The court will identify the purpose of the gift aid provisions to ensure that correct interpretation of the section is used. When considering section 413 onwards, tax relief was made available on monetary gifts made to the charities without qualification. Under section 413, it is the lack of qualification that makes a gift 'genuine'. The court considered that it was the intention of Parliament to ensure that no Gift Aid relief would be possible where there was some inappropriate advantage that arose from the donations, conditions attached to the donations or qualification beyond the giving of the gift itself.
HMRC argued that the gift aid donations made to the second appellant were not met under three conditions of section 416 ITA 2007, those being:
- Condition B, that the payment be not subject to any condition as to repayment.
- Condition E, that the payment was not conditional on, associated with or part of an arrangement involving the acquisition or property by the charity from the individual or a person connected with then.
- Condition F, that there were no benefits associated with the gift (including benefits obtained by a person connected with the donee).
Although the appellants were successful in arguing that Condition B was met, the court held that the appellants failed to meet the requirements of Conditions E and F.
The intention of Gift Aid is that is be made for genuine charitable gifts; it cannot be used to enact tax avoidance schemes. To make a successful Gift Aid claim, donors should adhere to the necessary conditions and requirements set out in section 416 ITA 2007 or risk facing a challenge from HMRC.
The case was not on facts which many operational charities will encounter but is a useful reminder of the importance of ensuring that all of the conditions for Gift Aid need to be in place to ensure donations will qualify for the relief.
This piece was co-authored by Ethan Lees, a trainee solicitor at the time of writing.
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