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Legal Eagle

Miscellaneous

Q: Saving charity from the taxman

We are organising a show for the tsunami appeal. How do we safeguard as much of the money raised as possible for the victims, rather than the taxman?

A: Providing relief for victims of disasters, such as the tsunami in Asia, is a recognised charitable object under English law and charity funds of this nature are exempt from income tax and capital gains tax.

There is nothing to stop anyone from setting up a disaster relief fund and seeking to persuade the Inland Revenue it qualifies for tax relief. However, because such emergency funding is often required very quickly, there may be insufficient time - and possibly some reluctance to incur the attendant expense involved - to set up a properly constituted charitable body to administer the fund concerned. In such a case, there are, however, three very good reasons for ensuring that disaster funds of this kind are routed through and passed to and administered by a properly constituted and registered charity. The first is that registered charities, particularly the larger and more well-known ones, are more likely to have the personnel and resources to ensure that the money is quickly put to good use for the purpose for which it is intended. Secondly, donations to a registered, properly constituted charity, whose affairs are conducted under the supervision of the Charities Commission, are less likely to be put to unauthorised or dishonest use. Thirdly, registered charities, by virtue of their established status and supervision by the Charities Commission are less likely than otherwise to encounter problems and delays with the Inland Revenue in obtaining tax relief on the funds concerned. While in principle the tax relief is available to any body of persons or trust established exclusively for charitable purposes, it does not follow that every such unregistered appeal fund will be treated as a charity, if it is unable to convince the Revenue that it fulfils the crucial elements of public benefit, and absence of unauthorised expenditure. It is obviously important that the public should have complete confidence as to the way in which their donations will be handled.

Doubtless, it is for reasons of this kind that, for example, certain national newspaper tsunami appeal funds are expressed to be conducted under the auspices of The Disasters Emergency Committee, which is a registered charity, and I recommend you to take a similar step with your own fund.

There are two publications on the subject which you may care to obtain and read. They are firstly, the attorney general's Guidelines on Disaster Funds and how to deal with them, which are obtainable from HM Stationery Office, and secondly Inland Revenue Guidelines on Tax Treatment of Appeal Funds, obtainable from your local tax office.

Note that, if the donor is a UK taxpayer, it is possible to enhance the amount of the gift to the disaster fund by taking advantage of the Gift Aid Scheme, which is available for both individual and corporate donors. All the donor has to do is to give the charity a declaration that they want the donation to be treated as Gift Aid and that they have paid income tax or capital gains tax at least equal to the tax which the charity is able then to reclaim from the Revenue at the applicable rate. For example, if the donor gives the charity a cheque for £100 with a Gift Aid declaration it will be able to get an additional £28 from the Revenue, since the donor will be treated as having given it £128 less tax at the standard rate of 22% (£28). It will cost the donor nothing more than if the donor had given no money at all, because the donor will be regarded as having made the donation out of their own taxed or taxable income. Furthermore, if the donor is a higher rate taxpayer, they can get higher rate personal tax relief on the gift. Obviously the charity will more easily and more quickly be able to recover Gift Aid tax if it is properly registered. Similar tax relief under the Gift Aid Scheme is available for gifts of certain real property, shares and marketable securities.

If the donor is concerned to know how much of the gift may be spent by the charity on administration, this information, or at least an approximation, should be obtainable from the charity concerned - but bear in mind that the logistical problems involved in getting the relief to the place and in the form where it is most needed are immense and administration costs may be a necessary, indeed vital element in achieving the desired objective. Certain credit card companies have announced that they are waiving all charges on payment by credit card to tsunami disaster funds, so if the donor intends to pay by this method they may care to check whether this applies to the particular credit card company concerned before doing so.

First published 10th February 2005