HMRC guidance on loan waivers and loan repayments has been updated to clarify the requirements for each to be considered a qualifying donation for Gift Aid relief.

The new text, in sections 3.13 and 3.45, is much improved and clearer. The relevant sections are reproduced in full below.

We welcome the changes to the guidance which have resulted from extensive consultation between CTG representatives and HMRC officials. We are particularly grateful to Nicola Evans, Charities Counsel at BDB Pitmans, for her expert technical support.

CTG Vice Chair, Kevin Russell, who is part of the team that has consulted with HMRC on this said: “The publication of this revised guidance is very welcome and brings much needed clarity to this relatively new understanding of Gift Aid on waived refunds and loan repayments. We are most grateful to representatives from HMRC for engaging so positively with us on this.”

Where the arrangement being waived is a loan repayment, HMRC would expect there to be a legally enforceable document in place. CTG is in the process of developing model documents and these will be published in due course.

To recap the background to this issue, HMRC published guidance in May 2021, confirming that Gift Aid can be claimed on Waived Refunds and Loan Repayments. Previously a waiver of debt was not eligible for Gift Aid, without funds being returned to a donor first, as Gift Aid requires a “payment of a sum of money”. In response to the cancellation of many charity events as a result of COVID-19, the Charity Tax Group wrote to Treasury Ministers requesting that donors be allowed to convert their tickets to donations that could have Gift Aid applied. HMRC agreed and introduced a temporary concession in April 2020. Subsequently, HMRC confirmed that it was making this change permanent, so that waivers of refunds and repayment of loans to charities, can count as donations to which Gift Aid can apply, provided the agreement to waive the loan/right to a refund is clear and irrevocable.

HMRC guidance Chapter 3: Gift Aid

Chapter 3.13 Qualifying charitable donations and restrictions on Gift Aid treatment

3.13.2 If individual or company waives a refund or loan repayment, it can be considered a donation (of a sum of money) providing there is a clear agreement either to:

• cancel a loan
• not accept a refund

Read paragraph 3.45 for more information.

3.13.3 There are certain restrictions on what constitutes a qualifying charitable donation and therefore the availability of Gift Aid relief for companies or connected persons. A payment is not a qualifying donation if:

• it’s a dividend or distribution of profits
• it’s conditional on repayment (our emphasis)
• the company or a connected person receives a benefit which exceeds the ‘relevant value’ in relation to the payment
• it’s made by a charity or community amateur sports clubs
• it’s conditional on the charity acquiring property that has not been gifted to them
• it’s part of an arrangement whereby the charity acquires property that has not been gifted to them

CTG comment:The amended wording above that states “it’s conditional on repayment” is not helpful.  The original wording that “A payment is not a qualifying donation if … it is made subject to a condition as to repayment” is rather clearer. For example, the new wording does not make it crystal clear that if a charity appeal for funds states that “if insufficient funds are raised, donations will be returned to donors”, those donations will not be eligible for Gift Aid from the outset.

Chapter 3.45 Claiming Gift Aid on waived refunds and loan repayments

3.45.1 HMRC will consider donations made from a waiver of a right to either a refund or loan repayment to be eligible for Gift Aid. This is provided the charity meets both of these conditions:

• the charity holds a record of the waiver
• it meets all other Gift Aid rules including the requirement for a payment of a sum of money (read sections 3.2.1 and 3.13.1 to 3.13.2)

Examples of waived refunds and loan and how Gift Aid can apply

If Ms Jones buys and pays for tickets for a charity event which is subsequently cancelled, giving rise to a right of refund, Ms Jones can choose to waive her refund and donate it to the charity. If all other conditions for Gift Aid are met, the donation can be a qualifying donation for Gift Aid because Ms Jones had already paid a sum of money to the charity when she bought the tickets.

A company X Ltd lends £20,000 to a charity, repayable over 5 years at an interest rate of 2% per year. After one year, X Ltd decides to release the charity from £10,000 of the loan and the interest due on that sum. The donation made on the release of the £10,000 capital can be a qualifying donation for Gift Aid purposes (because X Ltd had paid the sum of money to the charity). But the donation of the interest due on the £10,000 cannot be a qualifying donation as X Ltd never paid a sum of money to the charity equivalent to the interest.

3.45.2 HMRC will consider the donation to have been made at the date of the waiver and not the date of the original payment. For waivers by individuals a Gift Aid declaration will need to be collected by the charity if one is not already held for the donor.

3.45.3 The record of the waiver that HMRC expects the charity to keep depends on the arrangement being waived

3.45.4 For a small refund arrangement, for example a couple of tickets to a fund-raising event, which has been cancelled, the charity should keep an auditable record of correspondence between the charity and the taxpayer. This should confirm that no refund is required and that this amount is to be treated as a donation for Gift Aid purposes. Examples of this correspondence could include:

• an email exchange
• a letter out to the taxpayer and their response
• a recorded telephone call

3.45.5 Where a person is entitled to a refund, HMRC expects charities to explain clearly that they can choose between either:

• obtaining a full refund
• waiving their right to a refund (in whole or part) and having their payment classed as a qualifying donation

Charities must not place any pressure on the person to waive their right to a refund. The person must positively choose to waive their right.

3.45.6 Where the arrangement being waived is a loan repayment, HMRC would expect there to be a legally enforceable document in place (such as a deed), so that the donor cannot subsequently seek to enforce repayment of the money which they have claimed to donate. Amongst other things, the document should:

• contain details of what is being waived, (making it very clear that the lender is giving up all legal rights to any future repayment)
• confirm the amount waived which is to be treated as a donation for Gift Aid (being clear that only capital of the loan can qualify, not interest)

3.45.7 An individual donor must make sure that they have paid sufficient tax to cover their donation, for the year in which the donation is deemed to be made. A company donor must take care only to claim relief once all relevant necessary accounting adjustments are made.