Over the last fortnight, the British public have given generously to good causes, including the Philippines Appeal and Children in Need. Meanwhile, the Duchess of Cambridge has been visiting a charity that helps prevent bullying, and Shelter has reported a 10% increase in calls from people worried about losing their homes. Charities are busy as always, making a difference and helping people in need.
Against this backdrop, a NAO report out today has garnered a fair amount of media coverage claiming there is no evidence Gift Aid incentivises donations. Importantly, this isn’t quite what the report said – it highlighted the lack of evidence being gathered by HMRC to assess this. Nonetheless, I want to address this and other concerns raised by the report head on.
What is Gift Aid for?
Importantly, Gift Aid is not just about incentivising donations; it recognises that money given to charities should not be taxed because it is used for public good. NAO’s report recognises the broad political consensus over decades that donations to charity should be exempt from tax – a principle that has been enshrined in law since the Income Tax Act in 1842.
Gift Aid makes donations to charities go much further than they would have done otherwise: it is an invaluable source of support for tens of thousands of charities. It also, therefore, reflects a demonstrable commitment from the government to supporting the voluntary sector as a whole.
Finally, to get technical, while the NAO says there is no evidence Gift Aid is incentivising an increase in giving, there is also no evidence that it doesn’t. We don’t know what would have happened to donations if Gift Aid wasn’t available. What we do know from research is that people are primarily motivated by causes they care about; so Gift Aid isn’t likely to be the factor that triggers a decision to give. But it might be a factor in how much they give. There is research (by Sarah Smith at the University of Bristol and Theresa Lloyd and Beth Breeze’s ‘Richer Lives’) which particularly shows that wealthier donors are sensitive to tax incentives. However, it’s important to remember that wealthy donors do not stand to gain from Gift Aid: they still give away far more than they can reclaim in tax relief.
How can we make Gift Aid better?
The NAO report finds that HMRC does not have a goal around increasing the take-up of Gift Aid by charities. We think this is a missed opportunity to achieve greater impact with this relief.
If, as I’ve argued above, Gift Aid is based on a principle that giving to charity should not be taxed, and that it represents a commitment to supporting the voluntary sector as a whole, then promoting take-up could make a real difference. Particularly at a time when many charities are really struggling, Gift Aid represents an efficient way for Government to support a wide and diverse range of organisations.
It is encouraging that the Treasury recognise this in their press response today: “We have recently consulted with the sector on modernising Gift Aid and we work closely with charities to make it as easy as possible for them to claim tax relief.”
Fraud and error
For the first time, the NAO has released information about fraud, tax avoidance and error rates relating to Gift Aid. Specifically, £15m fraud, £110m tax avoidance and £45m error.
These numbers need to be contextualised.
Firstly, the NAO has stressed that these cases do not involve the general public and giving to recognised charities. These are cases where people have deliberately attempted to abuse charity tax relief – it is the job of the Charity Commission and HMRC to work more closely together to investigate and stop these cases. It is good to see that for every £1 spent on these investigations, £44 is already being recovered.
Secondly, any tax relief incurs a certain rate of fraud and error. Speaking yesterday to the NAO, they confirmed that these rates are broadly ‘average’ and ‘on a par’ with other tax reliefs. HMRC has also estimated the total UK ‘tax gap’ through tax avoidance at £35bn per year – this is clearly a much bigger issue, of which avoidance schemes abusing Gift Aid are a very small percentage. This is not to minimise the issue: it is in all of our interests to crack down on abuse and NCVO has been an active contributor to HMRC’s working groups addressing this issue.
Thirdly, transparency is helpful. Now we know more about the scale of the challenge, we can help to tackle it. Whereas tax avoidance schemes are for HMRC to investigate and address (with our support for their actions to do so), charities can help to minimise the rates of error. What we know from discussions with Treasury is that there are a range of common errors that occur. Often these relate to people not realising that they haven’t paid enough income tax in that year to cover the Gift Aid on their donation – for example, a non-working spouse giving from a joint account, or retired individuals and students. Charities already check their claims carefully to remove any erroneous claims, but the more we know about the issue, the more we can do to help address it.
Charlotte Ravenscroft was NCVO’s head of policy and public services. Charlotte’s wrote about funding, public service delivery, and strengthening the evidence base for voluntary action. She has also worked at The National Lottery Community Fund and the Department for Education. 
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