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Tax-Deductible Charitable Donations: Are there Benefits to Giving?

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Bottom Line Express - 20/05/09 - Written by:

To get detailed advice on making donations to charity, give the Peninsula TaxWise Advice Service a call on 01455 852555.

Doing business in a responsible, sustainable way goes hand in hand with doing business successfully even in these current difficult financial times.

Corporate Social Responsibility (CSR) is about how businesses align their values and behaviour with the expectations and needs of stakeholders – not just customers and investors, but also employees, suppliers, communities, regulators, special interest groups and society as a whole. One of the ways which companies can be seen to be acting in a ‘socially responsibleÂ’ is to give to both local and national charities, and, if carried out correctly, can gain tax relief on the donations.

Gifts of money made to a charity by a company should be paid gross – before tax is deducted. These donations are deductible from the total profits of your business when calculating Corporation Tax. A company can claim relief as long as the donation is a payment of money that is not a distribution of profit such as a dividend.

The Government has stated its intention to create a new `giving age’, and, as part of this initiative, is seeking to make the tax system `more modern, flexible and simple’ for donors and charities. This has given employers options when looking at making a charitable donation and there a few that they could considerÂ…

Individuals

There are various ways of achieving charitable donations tax efficiently including;

  • Gift Aid
  • Payroll Giving
  • Self Assessment Giving
  • Shares & Securities

Gift Aid

Gift Aid applies to large or small, regular or one-off payments to UK charities. A donor completes a declaration to confirm that they will pay an amount of Income Tax or Capital Gains Tax (equal to the tax the charity claims on their donations) for the year in which the donation(s) was (were) made.

Gift Aid allows the charity to reclaim the basic rate tax on the donation from HMRC.

A higher rate income tax payer can claim tax relief on the difference between the basic and higher rate tax on each of their donations.

Example

John is a higher rate taxpayer and donates £100 to charity. As he pays regular Income Tax on his earnings, the basic rate of tax on his donation has already been covered by his tax payments and the charity claims back the basic rate tax of 20% from HMRC. So the charity is able to make a repayment claim of £25 (£100/4) and HMRC will add an additional transitional relief of £3, making a total payment of £28.
As a higher rate taxpayer, John can claim the difference between the higher rate of tax at 40% and the basic rate of tax at 20% on the total value of his donation, so he can claim 20% of £125, a total of £25.

Payroll Giving

Payroll Giving lets employees (and people who receive a company/personal pension) make donations to charities of their choice directly from their pay – providing they pay tax through PAYE. They can donate as much or as little as they want.

If employers decide to run a Payroll Giving Scheme for employees, regular deductions are taken from their pay through the payroll system. You deduct the amount an employee asks you to take from their pay after working out and deducting their National Insurance contributions, but before applying PAYE.

Employers pass on all the donations deducted to an approved Payroll Giving Agency. They then distribute the donations to the employees’ chosen charities – you don’t have to do anything else. All modern payroll systems can be set up to handle Payroll Giving and there are no extra tax forms to fill in.

Payroll Giving is simple to operate and it can help you to build good relations with your employees. Charities benefit because they get regular donations to help them with good causes. And your employees benefit because they get tax relief on the donations straight away at their top rate of tax, meaning that their donations cost them less.

Employers wanting to set up a Payroll Giving Scheme have to sign up with an approved Payroll Giving Agency. HM Revenue & Customs (HMRC) approves Payroll Giving Agencies and lists them on its website. Each Payroll Giving Agency is itself a charity.

Self Assessment Giving

Taxpayers who submit self-assessment returns to HMRC may find that a tax repayment is due to them. Under Self-Assessment giving they can choose to donate all or part of the repayment due to charity.

To do this, taxpayers need to put the unique reference code for the Charity of their choice in the relevant section of the form Self Assessment tax return ‘Giving your tax repayment to charity’ so that HMRC can pay the money straight into the Charity’s bank account.

Donors can also use Gift Aid to increase the value of their gift to your charity by 25 per cent. It doesnÂ’t cost them anything, but they must pay enough Income Tax or Capital Gains Tax to cover the tax that the charity will get back from HMRC.

Shares & Securities

Income Tax relief applies if you give or sell any qualifying investments to a UK charity at less than the market value. The amount you can deduct is the net benefit to the charity, plus incidental costs (broker or legal fees), less any disposal proceeds or other benefits received on disposal

Sponsoring a charity

It’s quite common for companies to agree sponsorship deals with charities. Companies usually get something in return for a sponsorship payment, for example by linking your company name (as sponsor) with the charity or project could give your company valuable publicity.

Sponsorship payments that your company make in return for something from the charity are treated differently for tax purposes from simple donations. The way they’re treated, and whether or not the company can claim tax relief for them, depends on the nature of the sponsorship arrangement and on the particular circumstances.

A company might do a deal with a charity to sponsor it, either by funding a particular event or project, or by sponsoring the charity’s general work. The sponsorship deal might involve a one-off payment or a regular amount.

If a company gets something in return for its sponsorship payment then itÂ’s likely to be regarded as a business expense. This could be high-profile advertising and publicity, for example, or perhaps access to the charity’s mailing list.

The company may be able to deduct the sponsorship payments when it works out its profits for tax purposes. But the charity could have to pay tax on the money if it can’t use one of the special tax exemptions available to charities. This is because it would be trading income for the charity, not a donation.

If the business gets nothing in return for the money it gives to charity then itÂ’s a straightforward donation. A simple public acknowledgement of your donation by the charity, perhaps in their newsletter for example, wouldn’t normally change this. And there’s no reason why you can’t generate some positive publicity for your business yourself by highlighting its links to charity.

Companies – but not sole traders or partnerships – that give money to charity can deduct the value from their Corporation Tax profits. The charity won’t pay any tax on the donation either, provided they use the money for charitable purposes.

To get detailed advice on making donations to charity, give the Peninsula TaxWise Advice Service a call on 01455 852555.

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