HMRC only makes limited checks before paying Gift Aid claims to avoid delays, so HMRC officials test the accuracy and validity of a proportion of claims in more detail by auditing them. Charities may therefore be selected for audit and details of how this works are given in the detailed Gift Aid guidance on the HMRC website.

Auditors will check records supporting a tax repayment claim including donation records, Gift Aid declarations and banking/cash records. This will usually involve reviewing the charity’s accounting records, systems and procedures. During the course of an audit they may also identify other potential tax risks – such as non-charitable expenditure, PAYE and VAT issues.

On the day the audit ends, the auditor will go through what has been reviewed and the results of the review. The same information will be included in a letter to the charity summarising the audit findings and what action the charity may need to consider. If the auditors find that less tax has been claimed than was due they will help the charity to make a further repayment claim.

If the auditors cannot substantiate a tax repayment claim and too much has been paid to the charity, they will explain the problem and the formal process to recover the tax. A summary of the amounts of tax recoverable for all relevant years and a computation of interest due will be provided together with, where appropriate, the basis for any penalties that the auditors believe are due.

Where either the amount or level of errors is small, HMRC may agree with the charity to use a ‘yellow card’ warning system, whereby HMRC will only seek to recover the tax due in respect of the year under review, and not earlier years, and the charity agrees to take remedial action as required by HMRC to improve their record keeping,

Retention of Records

A charitable company must keep Gift Aid declarations and records until six years after the end of the accounting period they relate to. A charitable trust should keep them until the later of:

• six years after the end of the tax year they relate to, and
• 12 months after making the Gift Aid repayment claim for that tax year.

Note that previous HMRC guidance stated that the four-year time limit for making claims also applied to the retention of records. This was incorrect; but if a charity, before January 2012 followed this guidance and destroyed records between four and six years old, it will not be penalised.