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Gift Aid Schemes for Charity Shops

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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

Gift Aid form

  • Donor
  • Charity

Shop

a shop and signs up to the Gift Aid scheme. signs up to the Gift Aid scheme. This creates an agency agreementiii between the donor and the charity shop. Ownership of the goods remains with the donor at this stage and the charity shop agrees to try to sell the goods on behalf of the donor in exchange for a small commission (typically 1% - 5%).

Contract appointing charity shop as agent

Agent
Goods

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

Customer

Donor
Charity

Shop

££ Hold as Agent

Goods

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

  • Donor
  • Charity

Shop
Customer

Goods

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 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 directly, it is essential from a charity law

Calculating commission



It is important that you are able to justify the percentage charged perspective to charge commission. This is because the scheme involves the provision of a non-charitable service to members of the public – i.e. the service of acting as agent to sell goods on their behalf. It is not possible for a charity to provide such a service free of charge.

Must cover incremental costs of

running the scheme Economies of scale – the cost may be lower for outlet chains

The other key reason relates to VATiv and applies regardless of whether the scheme is operated by the charity or its trading company. This is a "business activity" for VAT purposes, 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.
What are others charging? 1%,

2%, 5% (this is useful but is not sufficient on its own to justify your approach)

Notification letters

Which process can we use?

There are different requirements for notification letters depending on which process is being used. For the standard process, letters must always be sent before donations can be deemed made. For Method A and Method B (assuming the donor does not opt to receive them more regularly) notification letters are only required after a certain amount of net proceeds from the sale of all goods belonging to

Trading Company

  • Process
  • Charity

YES YES NO
YES YES YES

Standard Method A Method B

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

. The donor must own the goods and be a UK taxpayer

. A Gift Aid declaration is required . Commission (plus VAT) is charged . The potential tax implications for the donor

. Sufficient tax (income tax and capital gains tax) must have been 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.

The expression "charity shop" is used in this note where the relevant guidance applies regardless of whether the scheme is operated

ii

by the charity or its trading company. We have template Gift Aid forms containing the agency agreement to which our members can refer – please see the members

iii

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'.

Template letter (standard method): http://www.hmrc.gov.uk/charities/guidance-notes/chapter3/ga-claim-letter-standard.pdf

v

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.

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