It’s my bag

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KEY POINTS

• Relief for gifts of cash and qualifying assets.
• The retail gift aid scheme.
• Tax benefits for higher rate taxpayers.
• Don’t forget relief for basic rate taxpayers.
• Other implications for charity supporters and charities.

Those who know me and readers of previous articles will probably have gathered by now that musical technology of the past thirty or so years has pretty much passed me by (like so much else, you may well add) and the vinyl record still reigns supreme at Chez Curtis. (Look, no, if you don’t mind, I’d rather you didn’t play them when I’m not there, not now that I have them all nicely filed in artist and date order…)

Consequently, if I can escape from Waitrose and the food shopping (or the shoe shop and shoe shopping more likely) for a few minutes, there’s nothing that beats a quick rootle around in one of the few places that you can still get vinyl these days; viz, the charity shop record bin.

This is particularly the case since Croydon’s world famous Beano’s – the second-hand record shop conveniently placed close to Taxation Towers – closed its doors to further business last year. Many’s the happy lunchtime I spent browsing their shelves, but I digress...

Now in my experience, the average charity shop record box is usually full of Bert Kaempfert’s Warm and Wonderful (if you say so), Wet, Wet, Wet’s greatest hits (a misnomer surely), and a plentiful supply of Phil Collins’s records (ahem).

However, occasionally one does find the odd little gem and the other day it was George Formby’s Leaning On A Lamp Post for £1.99.

A quick look at the record showed it to be in pristine condition (obviously owned by someone who wasn’t a fan), cover a little worn, but only to be expected. Cost: £1.99. ‘A bargain’ I thought to myself, looking forward to long winter evenings spent up in the study in the company of George and with ‘my little ukulele in my hand’.

It was only when I got to the counter that I noticed the ‘gift aid item’ sticker on the price label. Strange, I thought to myself, I can understand a gift aid form being completed when one makes a monetary donation to charity and I can understand giving something to a charity shop for it to sell, but what’s going on here then?

Shares and land

I thought that in addition to the gift aid relief for monetary donations, one only received tax relief for gifts of specific qualifying assets to charities; these reliefs applying to community amateur sports clubs (CASCs) as well.

The income tax relief that can be obtained for the gift of a ‘qualifying investment’ under ITA 2007, s 431 et seq applies to:

(a) shares or securities which are listed on a recognised stock exchange or dealt in on any designated market in the United Kingdom;
(b) units in an authorised unit trust;
(c) shares in an open-ended investment company;
(d) an interest in an offshore fund; and
(e) a qualifying interest in land.

Formby fans and others will note that George’s records do not appear on this list.

As an aside, the relief for the gift of shares has come under the spotlight in the last few years, with HMRC suggesting that the relief has been used for tax avoidance purposes.

And if there are two things that seem to get HMRC’s back up, it is the thought of the reliefs for charitable donations being used for tax avoidance (the other being the thought of the reliefs for pension premiums being used for tax avoidance).

In fact, it was only the other day that HMRC sent me the details of a statement by Stephen Timms, financial secretary to the Treasury, on the very subject.

This notes that a new scheme – involving shares in an offshore company being purchased by a taxpayer at a fraction of their supposed value and then being gifted to a charity – is being challenged and legislated against.

The statement notes that ‘the benefit to the charity is typically less than half of one percent of the value of the tax relief obtained’ and to give an idea of the department’s attitude here, the statement further notes that ‘it is particularly offensive that individuals seeking to avoid tax do so in a way that exploits charity tax reliefs’.

So what exactly is the point of the ‘gift aid item’ sticker on my George Formby record? Is tax relief being obtained on the gift of an asset rather than money? It appears that what I had stumbled upon on a wet Saturday afternoon in November was the ‘retail gift aid’ scheme.

Remember, gift aid only applies to gifts of money, not assets (other than the qualifying assets listed above) and therein lies the secret.

Despite appearances, with the retail gift aid scheme what is actually being given under the scheme is money, not donated goods; and this is done by the charity acting as an agent for the putative donor and, rather than simply selling donated goods, it is selling those goods on behalf of the owner.

Of course, while – to a ukulele player – George Formby is immediately recognisable, the difficulty is that a second-hand George Formby LP doesn’t have an immediately recognisable value.

Consequently, for HMRC to be happy that it is a qualifying gift aid payment that is being made, a certain sequence of events and rules must take place. This is explained on HMRC’s website.

• The goods remain the property of the owner until they are sold. It must be clear that it is the owner who is selling the goods and not the charity or the CASC. They are just acting as an agent on behalf of the potential donor.
• The owner must have the right to keep all or part of the proceeds of the sale, but can choose to donate all or part of the proceeds if they wish.
• The charity or CASC must contact the potential donor after the goods are sold and offer to pay them the proceeds from the sale of their goods.
• The donor must make a gift aid declaration for any donations made.

HMRC suggest that the donor should complete a gift aid declaration when they leave the goods at the charity shop before the goods are sold. However, it must also be clear that there is no commitment by the owner that a donation is to be made.

The charity are advised to make it clear to the owner what the exact arrangements are; if this is not done in writing, then all staff and volunteers should be able to explain the nature of the arrangements, how gift aid applies, and the consequences for the supporter.

Perhaps we should also note that the charity or its subsidiary trading company can charge a commission for making the sale and this would be deducted from the sale proceeds for the purposes of calculating the amount available to be given as a gift aid donation.

From a personal tax point of view, the charity supporter must remember to keep details of the amounts donated (for example, the letters or emails advising him of the amounts raised) for the relevant length of time.

Ordinarily, this would be until at least 22 months after the end of the tax year in which the payment was made.

This time limit is of course longer for the self-employed and those with income from property, who must maintain their records for at least 5 years and 22 months after the end of the tax year.

Example 1 illustrates how the retail gift aid scheme operates in practice.

Basic rate and non-taxpayers

In addition to those paying tax at the higher rate as shown by Example 1, ensuring that any gift aid payments are claimed is important for those who are entitled or potentially entitled to the age allowance as shown in Example 2.

Tax on the supporter

One point to remember when adopting this method of making donations to a charity (or CASC) is that if the charity is selling the goods on the supporter’s behalf then, for tax purposes, it is as if the supporter himself is making the sale.

If a chargeable asset with a substantial value was sold by a charity under this scheme, say some jewellery or a painting, then a liability to capital gains tax could arise on the charity supporter.

This problem would not arise if the asset itself was simply gifted to the charity, when TCGA 1992, s 257 applies and ‘the disposal and acquisition shall be treated … as being made for such consideration as to secure that neither a gain nor a loss accrues on the disposal’.

Income tax or corporation tax could also potentially be an issue for the donor. ITTOIA 2005, s 108 applies where a person carrying on a trade, profession or vocation gives an article

‘for the purposes of:

(a) a charity, a registered club or a body listed in s 108(4); or
(b) a designated educational establishment;

and the article is one manufactured, or of a class or description sold, by the donor…’.

In such circumstances, no receipt is brought into account. A similar relief applies under CAA 2001, s 63 where a fixed asset, etc. is donated to a charity. However, if the trader receives a benefit from the gift, then this would be subject to tax.

Similar rules apply if the donating business is a limited company (see CTA 2009 s 105).

If goods or the asset are sold by a charity on behalf of a trader, then the sale proceeds will need to be included in his accounts.

Remember that gift aid and the retail gift aid scheme only applies to an individual in his personal capacity, so if a trader subsequently donated the cash from such a sale he would then make a separate claim for any subsequent gift aid donation on his tax return.

Perhaps this is a good time to remember that the whole idea of the scheme is that there is no (and must not be any) obligation on the charity supporter to make a gift to the charity of the sale proceeds.

One would assume that this would not be an issue, but in the course of my research I did hear tell of someone who had donated a substantial item to a charity that was sold after having been given pride of place in their high street shop window.

On subsequently being advised of its sale and the sale proceeds, the person confirmed that actually, yes, he would like to receive the money received. Whether they had the nerve to return to the shop or whether the charity accepted any further ‘gifts’ from him is not known, but I have my suspicions.

Just as a final note on this point, HMRC do mention that if supporters sell ‘significant quantities’ of goods via the charity acting as their agent, ‘they must consider their own position in terms of income tax and VAT on the proceeds even though they may donate them to the charity’.

Generally, one will be selling one’s own unwanted items, but if assets have been purchased and sold/donated in this way then presumably the badges of a trade may exist.

The charities

As mentioned, my first practical experience of the scheme was at an Oxfam shop where the retail gift aid scheme is promoted under the ‘tag your bag’ slogan.

However, I understand that the first national charity to implement the retail gift aid scheme was Sue Ryder Care and that its use is responsible for additional gift aid repayment from HMRC of over £2 million per year.

The charity’s shops are operated by its trading subsidiary, Sue Ryder Care Direct Ltd, which donates its profits to the charity. In the normal course of events, every three months, the charity writes to those retail gift aid scheme donors whose sales have exceeded £40 during that period.

I understand that this will mean letters to between 20,000 and 25,000 supporters. Occasionally, the charity will do a ‘sweeping up exercise’ and will send letters to those with sales of a smaller amount, say £10. This might cover approximately 120,000 supporters.

A quick visit to my local British Heart Foundation (BHF) shop (no George Formby records unfortunately) and a conversation with their national office elicited useful information.

The local shop maintains detailed records of the charity supporters in their ‘gift aid club’ who receive a card showing their personal reference number.

This appears on stickers that show the price of goods so that a clear audit trail can be maintained for HMRC’s requirements. The scheme is being promoted on the charity’s flyers and collection bags where, after providing details of name, address, etc. supporters are asked to confirm that:

• they are taxpayers and have paid tax ‘at least equal to the tax that we reclaim on your donations in the appropriate tax year – currently 25p for each £1 that you give’;
• they wish BHF Shops Ltd to act as their agent in selling the goods; and
• they are not acting as a business in selling goods.

Mention of a subsidiary company operating the shops brings us to the other points flagged up by HMRC in their notes on the retail gift aid scheme.

This could form the subject of a separate article, but in brief this is that while the sale of donated goods by a charity is generally not regarded as a trade for tax purposes, sales on behalf of ‘potential donors’ in return for a commission would be.

HMRC suggest that charities might therefore wish to consider setting up a subsidiary company to protect the charity’s charitable status. The subsidiary would then gift its profits to the charity, claiming a deduction for this against its taxable profits under TA 1988, s 339.

Similarly, there are also potential VAT implications for the charity when selling on behalf of supporters.

Perhaps one should also mention that, theoretically, as the charity or its subsidiary are selling the goods on the donor’s behalf, then if there are any problems with the item sold this is presumably the responsibility of the charity supporter rather than the charity itself.

However, from my investigations, I am not aware that this is a problem and the charity would normally simply give a refund.

Conclusion

Even though Christmas has now passed, this is a time for giving and perhaps this is a good time of the year to become a charity donor under the retail gift aid scheme.

Why not combine this with a New Year’s resolution to have a clear-out around the house, under the bed, in the attic and the spare room?

After all, do you really need another set of soaps, candles or that novelty tie that you received this year.

Yes, I know you made the appropriate approving noises, but what are you going to do with these presents now, especially as last year’s are still under the bed?

Why not donate those unwanted gifts to your favourite charity – or better still put your name down as a supporter under the retail gift aid scheme and claim the tax relief if you are a higher rate taxpayer?

By the way, if you have any old George Formby LPs, you will let me know where you are taking them won’t you?

Issue Extract

tax_4237_curtis02.pdf

Issue: 4237 / Categories: Comment & Analysis , Income Tax