Thrive's Nick Venning examines how the Gift Aid system might be made simpler and more effective.


Gift Aid, introduced in the Finance Act 1990, is probably the most important way in which Government can encourage citizens to donate to charity. For every £1 that a taxpayer gives, HM Revenue & Customs (HMRC) will allow that charity to reclaim a further 28p. Essentially, the system says that Government does not gather tax on charitable donations.

This is an admirable principle and potentially a hugely benefit to charities.

However, in practice the system is plagued by bureaucracy. It is archaic that, in the 21st century, every donor has to physically sign a paper declaration that they are a taxpayer and that the charity then has to file this so that HMRC can, if they wish, audit the validity of the claim made by the charity. And, just for good measure, this must be repeated for every different charity that a donor supports.

It may therefore come as no surprise that, according to UK Giving Survey 2005/06, only 34 per cent of donors used Gift Aid. Charities could be losing out on up to two-thirds of their claim potential. Why is this?

Whilst it may be partially a matter of donor awareness, there are two reasons inherent in the system itself. Firstly, donors are wary of signing anything to do with HM Revenue & Customs; they are often uncertain of the tax implications of the declaration or concerned about privacy issues. Secondly, not every charity is registered to recover Gift Aid and, as is often the case for smaller charities, the administrative burden (and cost) can be prohibitive, particularly for large numbers of small donations.

In 2007, Gordon Brown heralded a wide ranging consultation process and review of Gift Aid; by September of that year, HM Treasury reported that it had received 98 written and 257 online submissions and dialogued with approximately 300 voluntary sector organisations at consultation events. Sadly, little has resulted; despite some very clear suggestions arising from the consultations.

So, what do we need to change?

In principle, we need to convert the after-thought mind-set of the current approach to Gift Aid to one of standard universal practice. This is about awareness and branding. If Government is serious about creating an equitable society, they should directly promote Gift Aid through direct advertising, the education system and perhaps even an official (search engine optimised) website.

We need to minimise the book-keeping burden. An obvious way to do this would be through a single universal declaration whereby a taxpayer registers his or her position on a central Gift Aid database; after which any donation made, to any charity, he/she would be verified eligible for Gift Aid supported donations. This would essentially reverse the burden from the voluntary organisation onto HMRC.

A more radical approach might be to consider all donors to be taxpayers and simply have HMRC pay charities a composite rate based on the amounts of voluntary income in their audited accounts. This would of course also totally eliminate any need for the donor to make a declaration or charity to retain any records.

Next we need to reform the HMRC audit approach and the penalties that charities can face. The simplest solution here would be to allow charities a de minimis error rate, of say five to ten per cent, before penalties hit. This would essentially mean that honest mistakes or lost paperwork are forgiven and the “fear factor” of reluctant charities would become largely eliminated.

Finally, what about higher rate taxpayers? Donations from higher rate taxpayers currently attract exactly the same Gift Aid relief as donations from standard rate taxpayers but these fortunate individuals can actually claim a further relief for themselves. Why not make the full relief accruable to the charity? Most donors with incomes high enough to attract higher rate income tax are unlikely to object.

So, let’s make it easier for donors to give and easier for voluntary organisations to receive. This is the fourth wealthiest nation on earth, surely we should strive to make it easier for our citizens to help the less fortunate in this society.