The Office of Tax Simplification (OTS) has published a policy paper on its Claims and Elections review. Almost all of the UK’s 1,190 tax reliefs require that the taxpayer makes a claim to receive the relief – including charities. CTG has engaged with the OTS to share our support for maximising the effectiveness of personal tax accounts.

In the report, the OTS explores ways in which the administrative processes for making claims and elections could be simplified, across Income Tax, Corporation Tax, Capital Gains Tax and VAT. The report makes 15 recommendations, both on general areas that would help to improve the operation of claims and elections across the tax system and on specific claims and elections where processes could be simplified. The key areas are:

• Increased functionality of the personal tax account and the business tax account (including the forthcoming, merged, single digital account), including adding the ability to make more claims and elections within the account and store information about them
• Changes to employee expenses to improve the process of making a claim as well as reducing the number of different levels of flat rate expenses that have to be considered. Over 5 million employees each year currently claim tax relief on expenses not reimbursed by their employer.
• Improvements to HMRC online forms

The recommendations relating to Gift Aid will be of particular importance to charities and have been reproduced below.

The Online Tax Account and the government’s 10-year plan

The most frequently suggested claims and elections that could helpfully be included in the personal tax account, to help those who do not have to make Self Assessment tax returns, were claims for relief for Gift Aid, pension contributions and nominations of main residences for Capital Gains Tax purposes. Additionally, the online claim form for certain employee expenses should be included in the personal tax account instead of being a standalone item.

Recommendation 1: As part of government’s work on the digitisation of the tax administration, HMRC should ensure that the personal tax account and the business tax account (including the forthcoming, merged, single digital account) are the hub for all taxpayer engagement with HMRC. This will require adding additional functionality to the accounts and ensuring that claims and other contact processes are all made through them. Specific points include:

• introducing the facility to make standalone claims or elections, including uploading supporting documentation where appropriate
• enabling a record to be kept of claims and elections that have been made in the past

Gift Aid election to carry back relief

Background: Payments made by individuals to charities can, in most circumstances, be made using ‘Gift Aid’. A Gift Aided payment enables the charity to claim back basic rate tax effectively paid by the donor (giver) on that donation.

For example, if a donor gives a charity cash of £800 under Gift Aid, the charity can reclaim basic rate tax of £200 from HMRC.

The donor is treated as having made a gross donation of £1,000 for tax purposes and, if they are a higher-rate or additional-rate taxpayer they can claim further tax relief on their donation.

Case study 1: Anna is a higher-rate taxpayer. She donates £800 to her favourite charity: the charity can claim Gift Aid of £200. The total donation is therefore £1,000 and Anna can claim higher-rate tax relief of £200 (£400 – £200).

Providing various conditions are met, the donor can also, if they wish, elect for that donation to be treated as if it were made in the previous tax year.

For the 2018-19 tax year, the average level of a Gift Aid contribution carried back (in this case, to 2017-18), was of the order of £27,123 per taxpayer. Levels have been rising consistently year on year, from an average of £18,621 in 2013-14.

Although Gift Aid is of course immensely helpful to charities, some respondents have indicated that the carry back provisions were overly complicated, particularly where relatively small amounts are involved.

Observations: Gift Aid, when claimed in the year in which it is paid, is a relatively straightforward claim particularly where the taxpayer makes the claim in their Self Assessment tax return.

However, respondents commented that one issue that causes difficulty with Gift Aid is the ability to make an election to carry back to earlier years.

The ability to treat donations as if they were made in the previous year can be very helpful in some situations, for example if a taxpayer is a higher-rate taxpayer in one year and a basic rate taxpayer in the following year. This can arise, for example, where a business owner has sold their business and wants to make a Gift Aid donation. If the donation had to be made in the year of the business sale, it may not be known by the end of the tax year what level of donation could be made.

A similar situation would be a City trader paid a large bonus, perhaps towards the end of the tax year.

The election was introduced in 2003 as part of a wider reform of Gift Aid measures designed to encourage charitable giving.

When debating the measures though Parliament, one of the comments at that time was that the measure ‘will act as a prompt and an incentive to higher rate taxpayers by making Gift Aid relief immediately available’. It was also noted that ‘the link to the filing of the Self Assessment return for the previous year is a key part of the government’s planned measure in offering the incentive of claiming relief early rather than waiting until completion of the return for the year in which the gift was made’.

The carry back election is of course available to be used by all taxpayers, not just higher rate taxpayers, and in relation to gifts of any size.

This can be helpful in many situations, for example a taxpayer who pays tax at basic rate in the year the gift is made, but was previously a higher rate taxpayer, can obtain higher rate relief by using the carry back election. Or a taxpayer who was a basic rate taxpayer but who has had a temporary change of circumstances may find the use of the carry back election helpful.

Case study 2: Hari is a successful entrepreneur and usually an additional rate taxpayer. He sells his business for £5 million in March 2020 and decides to live on the proceeds for a year or two. He would like to make a donation of £500,000 to charity but knows his income will be relatively low in 2020-21, so he would not pay enough tax to cover the Gift Aid element of the donation. He makes the donation in June 2020 and, when preparing his return for the 2019-20 tax year, decides to carry back the contribution to that year. He can claim additional rate tax relief on a gross contribution of £625,000.

The election is subject to a number of constraints which can create compliance issues.

For example, the election (normally made on the individual’s Self Assessment tax return) must be made on or before the date the individual files that tax return with HMRC and cannot be changed after that has been done.

Although this does give some certainty to HMRC, there is a difference between this and the general ability to be able to amend a tax return within one year of the normal filing deadline.

This seems odd, particularly as other entries in the tax return may need to be amended within normal timescales, perhaps through no fault of the taxpayer, which could affect the Gift Aid position (for example by creating a Gift Aid tax charge, if the taxpayer’s net income were reduced).

Another issue is that the election must relate to the whole of a specific Gift Aided donation, as there is no scope to carry back only part of the Gift Aided amount. This has the merit of simplicity, but can lead to unnecessary complication, perhaps because, when the donation is made, it is not always certain at that time how much can be carried back. Respondents said this could encourage taxpayers to delay filing their returns until very near the filing deadline.

Or it may be that a taxpayer has filed their return early but has had a subsequent change of circumstances.

Case study 3: Andy is a restaurant manager and makes Gift Aid contributions of £1,200 in late April each year to his favourite charity. He is a higher rate taxpayer and filed his 2019-20 tax return in May 2020, including the Gift Aid payment made in late April 2019. In June 2020 he was made redundant. Rather than looking for another job he decides to take on parental responsibilities so his wife can work full-time. His 2020-21 income is likely to be less than his personal allowance, and he is unlikely to have a tax liability in 2020-21. As he cannot carry back the £1,200 Gift Aid contribution made in late April 2020 to 2019-20 (because his 2019-20 tax return has already been filed) it is likely he will need to pay HMRC tax of £300 – which is basic rate tax on the net Gift Aid payment of £1,200 – when filing his 2020-21 tax return.

The current measures apply to all levels of Gift Aid donations, so the legislation does cause some complexity particularly when smaller donations are in point. One concern is that advisors may feel they need to consider the carry back election for their clients, often where small amounts are involved, perhaps incurring additional costs for little overall benefit.

The OTS has heard that order to avoid inadvertently missing opportunities, every taxpayer must review their position for both the current and the next year before deciding whether to opt for the carry back. Advisers must also watch this, and the related fees might well exceed the amount of tax involved.

Conclusions: The OTS suggests that the government should consider making changes to the gift aid carry back election to both simplify the process for those making higher levels of donations and remove the need to consider the election for those making lower levels of donation.

The OTS suggest that government consider restricting the ability to carry back gift aid donations to high value donations, perhaps those above £10,000, although this would need to be considered in more detail. This will remove the need for the majority to consider the best way to claim relief for their donations, a process that can lead to additional time spent and costs incurred, for little or no benefit.

For those that do make high value donations, the government should consider making changes to the process to make it easier for those who wish to make an election, by allowing part of a donation to be treated as carried back and allowing amendments within the normal timescales.

Recommendation 8: The government should consider making changes to Gift Aid carry back elections to:

• restrict the ability to carry back Gift Aid donations to high value donations and allow part of such a donation to be carried back
• allow tax returns to be amended within normal timescales to include Gift Aid carry back

Observations 

During the consultation, respondents were very positive about the prospect of greater functionality within the personal and business tax accounts. A range of the issues raised about making claims for specific reliefs or making elections, could be improved by greater utilisation and increased functionality within online tax accounts.

Respondents considered that adding the ability to make more claims and elections within the personal tax account would be beneficial for those that don’t currently need to complete a Self Assessment return. Some of the claims and elections that respondents most frequently suggested would sit better within the personal tax account are outlined below.

Gift aid: If a person that pays tax above the basic rate donates to charity with Gift Aid, they can claim back the difference between the basic rate on their donation and the rate that they pay. This can currently be done either through a Self Assessment return, or by contacting HMRC directly to amend the tax code (via phone or letter).

It would be simpler if claims for relief could be made via a dedicated area within the personal tax account. This would allow taxpayers to keep track of the Gift Aid payments they have made throughout the year and could allow for simpler way to reclaim the relief. It could also allow for HMRC to remind taxpayers to ensure that they have paid sufficient tax in a year to cover the donation if their income drops.