Gift Aid Schemes for Charity Shops

Gift Aid schemes for charity shops

Introductioni The basic position on Gift Aid is that it is not legally possible to claim Gift Aid on donated goods. Gift Aid claims can only be made in relation to genuine donations of cash from UK taxpayers to UK charities. However, years ago HMRC developed a scheme to enable charity shopsii to take advantage of Gift Aid, and it recently made some changes so that there are now three processes available.

Standard process Method A Method B

As a result of the basic legal position on Gift Aid claims, it was necessary to come up with a somewhat complex legal structure for the Gift Aid schemes for charity shops. As these schemes are essentially a regulatory concession offered by HMRC for charities, it is important to adopt best practice to avoid the risk of HMRC changing its policy.

The legal structure The underlying legal structure is the same for all three processes. A donor brings goods into Donor Gift Aid form Charity a shop and signs up to the Gift Aid scheme. Shop Contract signs up to the Gift Aid scheme. This creates appointing charity iii shop as agent an agency agreement between the donor Agent and the charity shop. Ownership of the goods remains with the donor at this stage and the Goods charity shop agrees to try to sell the goods on behalf of the donor in exchange for a small commission (typically 1% - 5%).

The charity shop then sells the goods to a customer and accepts cash for those goods on behalf of the donor. Customer At this point, ownership of the goods Donor Charity ££ Shop transfers to the customer, and the charity shop deducts its commission Hold as (plus VAT). The remaining cash Agent belongs to the donor and is only held by the charity shop as agent.

Goods

The net proceeds of sale belong to the Donor Charity Customer donor until the donor makes a donation to Shop the charity. Only at that point does the

cash belong to the charity, and a Gift Aid claim can then be made in respect of the donation (on the basis of the declarations ££ Goods made by the donor in the Gift Aid form signed at the outset).

Why must commission be charged?

Where the Gift Aid scheme is run by the charity Calculating commission directly, it is essential from a charity law perspective to charge commission. This is  It is important that you are able to because the scheme involves the provision of a justify the percentage charged non-charitable service to members of the public  Must cover incremental costs of – i.e. the service of acting as agent to sell goods running the scheme on their behalf. It is not possible for a charity to provide such a service free of charge.  Economies of scale – the cost may be lower for outlet chains The other key reason relates to VATiv and  What are others charging? 1%, applies regardless of whether the scheme is 2%, 5% (this is useful but is not operated by the charity or its trading company. sufficient on its own to justify This is a "business activity" for VAT purposes, your approach) so it is important that a reasonable charge is made for the service, as this income is relevant to the overall VAT position of the charity shop. When VAT registered, VAT must be charged on the commission.

Notification letters

Which process can we use? There are different requirements for notification letters depending on which process is being used. Trading Process Charity For the standard process, letters must always be Company sent before donations can be deemed made. For Standard YES YES Method A and Method B (assuming the donor does Method A YES YES not opt to receive them more regularly) notification letters are only required after a certain amount of Method B NO YES net proceeds from the sale of all goods belonging to that donor have been made in any tax year. For Method A, the relevant amount is £100 and for Method B the relevant amount is £1,000. HMRC requires certain wording to be used and has produced template letters to assist with thisv.

On the shop floor

What must shop staff tell donors? Shop staff should all be given training, including

. The donor must own the goods and guidance on the information that must be given to be a UK taxpayer donors when they sign up to the scheme. Most importantly, shop staff should ensure that the donor . A Gift Aid declaration is required is a UK taxpayer and warn them that there could be . Commission (plus VAT) is charged personal tax implications if they have not paid sufficient tax during the tax year to cover the total . The potential tax implications for amount of Gift Aid claimed by the charity in relation the donor to that donor's donations (income tax and capital . Sufficient tax (income tax and gains tax are the only relevant taxes for this capital gains tax) must have been purpose). paid to cover the Gift Aid claimed

“All staff and volunteers must understand and be able to correctly explain the nature of the arrangements, how Gift Aid applies, and the consequences for the owner of the goods” – Extract from HMRC Guidance

Equally important is the need to establish appropriate back office processes and procedures to track all goods relating to a specific donor so that the relevant donor for each cash donation can be easily identified. Many charities also find it helpful to work with a software partner on Gift Aidvi.

Disclaimer: Please note that this document is not intended to be legally or technically comprehensive and the Charity Retail Association cannot be held responsible for any errors or omissions, factual or otherwise, arising from reliance on it. This document is not a substitute for independent professional advice.

This note was authored by our corporate partners Blake Morgan. Please contact Liz Brownsell at Blake Morgan if you have any questions using the details below. Tel: +44 (0) 1865 253278 Mob: +44 (0) 7816 681480 Email: [email protected] www.blakemorgan.co.uk

i For detailed guidance on the Gift Aid schemes for charity shops, please see section 3.51 of the HMRC guidance available here: http://www.hmrc.gov.uk/charities/guidance-notes/chapter3/sectionf.htm#gg. ii The expression "charity shop" is used in this note where the relevant guidance applies regardless of whether the scheme is operated by the charity or its trading company. iii We have template Gift Aid forms containing the agency agreement to which our members can refer – please see the members section of our website. iv For further information on tax and VAT in relation to trading for charity shops, see our guidance note entitled 'Trading and Tax'. v Template letter (standard method): http://www.hmrc.gov.uk/charities/guidance-notes/chapter3/ga-claim-letter-standard.pdf Template letter £100 exceeded (Method A): http://www.hmrc.gov.uk/charities/guidance-notes/chapter3/ga-over100-pounds- exceeded.pdf Template letter for sales after £100 exceeded (Method A): http://www.hmrc.gov.uk/charities/guidance-notes/chapter3/ga-over100- pounds.pdf Template letter end of year (Method A): http://www.hmrc.gov.uk/charities/guidance-notes/chapter3/ga-end-of-year.pdf Template letter £1000 exceeded (Method B): http://www.hmrc.gov.uk/charities/guidance-notes/chapter3/ga-over1000-pounds-b.pdf Template letter for sales after £1000 exceeded (Method B): http://www.hmrc.gov.uk/charities/guidance-notes/chapter3/ga-over1000- pounds-subsequent-b.pdf Template letter end of year (Method B): http://www.hmrc.gov.uk/charities/guidance-notes/chapter3/ga-end-of-year-b.pdf vi You can find a list of corporate members of the Charity Retail Association who supply these services here: http://www.charityretail.org.uk/suppliers.html#EPOS.