The First-tier Tribunal decision in the Champions Fun Learning Centre case illustrates how difficult it can be to understand and apply the Gift Aid rules and HMRC’s guidance.  The decision has disappointingly little analysis of the Gift Aid rules and guidance, but is notable for the interesting facts and the unorthodox approach taken by the Tribunal in its decision-making.

The First-tier Tribunal considered various assessments, with interest and penalties, issued by HMRC in respect of the Champions Fun Learning Centre (the Charity).  Payments were made by parents and others in respect of education programmes provided by the Charity.  The Charity also benefited where volunteers either returned or failed to cash cheques for their expenses.  HMRC alleged the payments/waivers were not qualifying donations for Gift Aid and that the Charity had been careless in claiming Gift Aid.  The Tribunal found all the assessments to be invalid (being “riddled with errors” which were too fundamental and too misleading to enable the assessments to stand).  Nevertheless the Tribunal considered HMRC’s arguments regarding the Charity’s Gift Aid claims.

The issues considered in this commentary are:

1. Whether the payments made to the Charity were gifts at all.
2. Whether, if they were gifts, the conditions for them to be qualifying donations were complied with as to (i) refunds or (ii) benefits above the limits.
3. Whether the volunteers’ donations of their entitlement to expenses were qualifying donations.
4. Whether the Charity had been careless in making its Gift Aid claims (such as to give rise to a penalty).

The Tribunal also considered other issues relating to the Charity’s constitution, a double payment of Gift Aid relief and, in detail, the validity of the assessments and penalty, which are not considered here.

(1)        Were the payments gifts?

The Charity’s constitution provided that “Every parent shall pay the [Charity] a monthly sum …”.  FAQs on its website made reference to “fees” “donation stipulations”, “fixed donations” and potential refunds.  The PayPal donations page started “Purpose: Parent Contribution/Fees”.

HMRC argued that these references meant that the payments were not voluntary contributions but payments for a service and not eligible for Gift Aid.  They also argued that “donors” had had the same understanding, based on 4 responses to a questionnaire which HMRC had sent to a sample (10%) of the donors.

The Charity argued that they had sought to follow HMRC’s guidance on membership schemes about under 18s, that not all contributions were made by parents/guardians and that 15% of parents did not make donations.

The Tribunal gave some weight to the questionnaire responses showing that parents thought they were paying a monthly sum for tuition of their children.  The decision then sets out lengthy extracts from HMRC guidance on Gift Aid, first the passages relating to membership subscriptions (in response to the Charity’s claim to follow that part of the guidance) and then the paragraphs relating to educational trusts.

The Tribunal decided that the Charity had misinterpreted a passage in the guidance (para 3.37.10) as meaning that any payment made by a parent or guardian for membership services provided to a minor will be a gift.  (In fact, the passage is referring to paying other people’s subscriptions, saying that usually these would be a gift to the other person not to the charity, but can be a donation where the “other person” is the donor’s minor child, provided the payment would qualify as a gift if made by the donor personally).  The Charity had, therefore, operated under a misapprehension regarding the guidance.

The Tribunal would at that point be expected to apply the law to the facts of the case to determine whether or not, notwithstanding the Charity’s misapprehension and the apparent view of some of the “donors”, the payments were in fact qualifying donations.  Unfortunately, no such analysis follows.  Instead, the Tribunal appears to have applied the HMRC guidance relating to education trusts, rather than the law, to the situation before it.  To the extent that it did so, the approach must be wrong.

Having taken that approach, the Tribunal’s view (apparent from later in the decision) was that only the parental payments were capable of being disqualified as donations, but it was not prepared to say which ones failed on the information before it.

Given the facts, there was a real opportunity here for an important decision analysing such factors as: the wording used by the Charity in describing the payments; the practical impact of whether or not a payment was made (e.g. if tuition was provided whether or not any individual donation was made and whether a child was permitted to attend if no payment had been made on their behalf, which seemed to be the case); whether the Charity was operating a membership scheme; testing HMRC’s guidance relating to educational trusts; application of the donor benefit rules.  Unfortunately, that opportunity has been missed.

(2)(i)     Refunds

The Charity’s website FAQs provided, in response to a question whether there would be a “refund of fees paid or any donations made” if a child was unable to attend due to illness or emergency, that “if it is possible to offer a refund, we will”.  HMRC contended that this meant that there was a condition as to repayment preventing the payment from being a qualifying donation.

The Tribunal disagreed, finding that “the possibility of a refund of itself” was not such a condition.  However, as would be expected, the Tribunal agreed that any payments that were in fact refunded would not be gifts.

(2)(ii)    Donor benefits

HMRC argued that a benefit (education) was received here by an associated person (the child of the donor) and was received “in consequence of” the donation.  They argued that the small benefits rule was broken because the donor payments were £5 to £8 a week whereas the cost of providing the tuition was £25 to £30.

The Charity sought to argue that it was the other way round and the benefit was only about 16% of the value of the services provided (presumably on the basis that the service was not individual tuition, but tuition provided as a whole with all attendees benefiting).

The Tribunal took HMRC’s part, agreeing that provision of the tuition was a benefit where the donation was made by a parent (as the child would be an associated person), but found that the same may not be true where the payment was made by a guardian, depending then upon whether the child is “connected” within the legislative definition (s417 ITA 2007, read with s993 and s994(1)).  The Tribunal also determined that the value of the benefit in this case was the cost to the Charity of providing the service (although it said that this was “absent any other suggestion”) and that the size of the benefit was not to exceed a percentage of the donation (not the other way around).

Again, this appears to be a direct application of HMRC’s guidance relating to “educational trusts” with little or no analysis of the application of the law to the facts or, indeed, of other parts of HMRC’s guidance.  There is, for example, no analysis relating to valuing donor benefit or the application of the “in consequence” rule.  It seems that other argument on these points was not heard.

(3)        Volunteer waivers

HMRC submitted that it was not sufficient for volunteers to refuse or fail to cash their expenses for such amounts to be qualifying donations.  Rather, a “payment” of a “sum of money” required a physical payment from the Charity to the volunteer, which the volunteer may then choose to give back, or an exchange of cheques.  The Tribunal dismissed this as “picking at nits” and, had it been relevant, would have upheld the Charity’s contention that the volunteers’ waivers were qualifying donations.

In the Tribunal’s view, the crucial point was that the Charity was liable to pay the expenses.  However, traditionally, release of a debt has not been treated as payment of a sum of money.  A First-tier tribunal decision does not create a binding legal precedent, so charities may want to be wary of relying upon it.

(4)        Carelessness

The Tribunal found that the Charity had not been careless in making its claim.  It had been “conscientious in examining HMRC’s website in relation to membership schemes and other matters” and the fact that it came to an incorrect view did not mean it was careless of the Charity to come to that view.

The case certainly underlines that the Gift Aid rules are complex, difficult to navigate and easy to get wrong (including, as in this case, by HMRC) and that HMRC’s guidance on the rules can be difficult to navigate.  Unfortunately, the decision, which could have provided a great deal of clarity on the application of the rules, fails to do so and, in the apparent reliance of the Tribunal on guidance rather than the law, raises cause for concern.

Nicola Evans is Charities Counsel at Bircham Dyson Bell LLP