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Charity Shops Made Simple Charity shops made simple Ross Palmer September 2016 Charity shops made simple| September 2016 Charity shops made simple Ross Palmer September 2016 Agenda 1. Charity shops introduction 2. Gift Aid basics 3. Retail Gift Aid Scheme 4. VAT aspects 5. Income / Corporation Tax aspects 6. Business Rate relief 7. Summary 2 1 Charity shops made simple| September 2016 1. Charity shops introduction Basic charity shop operation can be very tax efficient for a charity: • VAT: sales of donated goods are zero-rated • Income / Corporation tax: profits are exempt • Business rates: 80% mandatory relief and 20% discretionary relief • Problem is no Gift Aid to be claimed as Gift Aid is only applicable to monetary gifts, not gifts of goods 3 1. Charity shops introduction • If the donor first sold their goods and then donated the proceeds, then Gift Aid could potentially be claimed on the proceeds • The Retail Gift Aid Scheme (‘RGAS’) is an HMRC approved way of doing this • Charity or trading sub sells the donor’s goods as agent of the donor • Donor then Gift Aids the proceeds to the charity 4 2 Charity shops made simple| September 2016 2. Gift Aid - how it works £125 £25 gross basic rate pay tax (20%) £25 At a 20% basic rate of tax, the basic rate Gift Aid is 25% of tax £100 the gift value net pay £100 Charity gift + Gift Aid declaration 5 2. Higher rate relief • Extra tax relief for higher rate taxpayers • For £100 donation Equivalent to £125 gross donation 40% taxpayer paid £50 tax on the donation (£125 x 40%) Charity gets 20% back – i.e. £25 Donor gets tax relief of £25 Cost of donation to donor was £100 - £25 = £75 6 3 Charity shops made simple| September 2016 2. Tax to cover • In any tax year (6 April – 5 April next) • The donor must have paid enough UK Income Tax plus UK Capital Gains Tax • To cover all Gift Aid claimed • On all the donor’s Gift Aid donations • To all charities or CASCs • Made in the tax year 7 2. Tax to cover • If HMRC establish the donor has not paid enough tax • HMRC may ask the charity to voluntarily refund Gift Aid to HMRC • But no obligation on the charity to do so (unless charity is complicit in tax avoidance) • Otherwise HMRC will charge the donor 8 4 Charity shops made simple| September 2016 2. Written Gift Aid declaration • Name of charity • Name and home address of donor (inc. UK postcode if in UK) • Identifies gifts to be Gift Aided (e.g. the enclosed gift and all future gifts) • Request to treat as Gift Aided (e.g. please Gift Aid …) • Date, if open ended declaration • Tax to cover statement 9 3. Retail Gift Aid Scheme • Cannot Gift Aid a donation of goods as not a monetary donation • Solution is to: • Sell the goods as agent of the donor • The sales proceeds less any selling commission belongs to the donor • The donor agrees to Gift Aid the net proceeds to the charity 10 5 Charity shops made simple| September 2016 3. RGAS: agency sales Selling as agent of the donor means: • The donor legally sells the goods to the end customer • The donor must have the right to retain the proceeds if they wish • The charity must (in principle) notify the donor when a sale is made and give them the opportunity to retain the proceeds 11 3. RGAS standard method Before 6 April 2013 this was the only way HMRC accepted for operating RGAS: • Donor notified of net proceeds periodically in writing • Donor is given 21 days to claim net proceeds • If not claimed, can assume net proceeds donated to charity under Gift Aid • This approach is now know as the ‘standard method’ 12 6 Charity shops made simple| September 2016 3. RGAS standard method From 6 April 2013: • Must notify donor using HMRC template wording • Must be a written agency agreement • Can be an agreement the donor signs or a leaflet to which the donor gives verbal consent • Can also include a Gift Aid declaration in the written agreement • Shop staff must explain key points of the agreement to the donor 13 3. RGAS methods A and B From 6 April 2013, two other options besides standard method – methods A and B. Idea is: • Donor agrees they do not need to be notified until annual net sales proceeds go above a set amount • Once gone above the set amount, must notify donor using HMRC template letters • Donor must be notified using the correct HMRC template letter for method A or B • Donor must be sent an end of year summary (to 5 April) by 31 May each year – HMRC templates also 14 7 Charity shops made simple| September 2016 3. RGAS methods A and B Method A: For use where shop operated by charity • Set amount must be at most £100 Method B: for use where shop operated by a trading subsidiary • Set amount must be at most £1,000 15 3. RGAS methods A and B • Set amounts work by tax year (6 April – 5 April next) • e.g. charity operated shop with set amount = £100 • Donor 1’s net sales in tax year = £80, no need to notify donor of sales until end of year statement • Donor 2’s net sales in tax year = £120, must notify donor of first sale that takes total net proceeds over £100 and thereafter, and send an end of year statement (but can combine these) • Must send end of year summary by 31 May 16 8 Charity shops made simple| September 2016 3. Retail Gift Aid Scheme • Donor letters must follow HMRC templates. Download from gov.uk website. Five templates: • Standard method: notify any sales • Method A notify sales above £100 • Method B notify sales above £1,000 • Method A end of year letter • Method B end of year letter • Last updated by HMRC in April 2016 – use up to date versions 17 3. Moving to methods A and B • Can write to existing scheme members saying will be transferred to A or B • Explain new method • Give them 30 days to notify if do not wish to be transferred • Or can ask members individually if they would agree to transfer when they drop in goods 18 9 Charity shops made simple| September 2016 3. Methods A and B – tax to cover • HMRC used to say that if donor hadn’t paid enough tax, the charity must repay the tax for the donor (i.e. repay the gift aid claimed) • But HMRC has now dropped this (from October 2015) • HMRC will ask the charity to voluntarily repay Gift Aid • But if the charity says no, HMRC will pursue the donor • Unless charity and donor complicit in tax avoidance, when HMRC can pursue the charity also 19 3. RGAS incentive schemes HMRC will not accept Gift Aid claims if inappropriate incentive or bonus schemes are operated, for example: • using targets for Gift Aid take up • publishing league tables of shops • giving bonuses, incentives, or otherwise rewarding increased Gift Aid claims from individual shops 20 10 Charity shops made simple| September 2016 3. RGAS practicalities • Do not use for goods donated by businesses • Get donor to sign agency agreement & Gift Aid Declaration at same time • Include that agent can repair goods and dispose of goods if considers unsaleable • Label goods so know which donor they belong to • HMRC recommend colour coding RGAS labels with sign in shop explaining that colour coded labels are sold as agent of donor 21 3. RGAS practicalities • At point of sale, add net proceeds to donor’s account • If using method A or B must have facility to generate annual statements • Commercial EPOS software now available that can handle RGAS • Donor letters can be sent by email • However if an email address is rejected or invalid the notification must be sent by post 22 11 Charity shops made simple| September 2016 3. RGAS practicalities • Any adjustments as a result of the donor notifying of a change in tax status or other details must be actioned within 2 months • HMRC say all shop staff involved in RGAS must undergo training • Charities must also undertake regular audits on a periodic or sample basis, as appropriate, to ensure RGAS processes are being followed correctly • HMRC may ask for evidence of training and checks when they carry out a Gift Aid audit 23 3. RGAS practicalities • If RGAS operated by trading sub, donating all sale proceeds less a small commission may cause cash flow and solvency problems for the subsidiary • However the subsidiary can also charge the charity a fundraiser’s commission • This can help maintain solvency whilst avoiding reducing the sales proceeds eligible for Gift Aid 24 12 Charity shops made simple| September 2016 4. VAT aspects Sale of goods: • By default standard-rated • Some goods zero-rated – books, food etc. • Sale of donated goods by a charity or trading subsidiary is zero-rated • Sale of personal goods by private individual will normally be outside the scope of VAT (the individual is not in the business of selling goods) 25 4. VAT: Sale of donated goods Zero-rated: • Sale by a charity of goods donated to it for sale • Sale by a non-charity of goods donated to it for sale if the profits are payable to a charity Sales must be: • To the general public or • To two or more specified persons (disabled or in receipt of certain benefits) • Latter approach used by recycling schemes to sell low price refurbished furniture / electrical goods etc.
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