EXPLANATORY NOTE

1. This Clause improves the tax incentives for giving to charity and makes them easier to use. The Clause:

• removes the present £250 minimum limit for Gift Aid donations

• brings donations made under a Deed of Covenant within the Gift Aid scheme

• extends the scheme to Crown servants and members of the UK armed forces serving overseas and to foreign donors

• extends the scheme to donors who pay capital gains tax and to donors who pay tax at below the basic rate

• replaces the requirement for a written certificate with each donation with a simpler, more flexible requirement for a Gift Aid declaration.

2. The Clause will allow tax relief on any donation, large or small, regular or one-off, provided it is made by a person who gives the charity a Gift Aid declaration. It will also remove the requirement that the donor pay basic rate income tax equal to the tax deducted from the donation. Instead, there will be a requirement that the donor pay an amount of income tax or capital gains tax, whether at the basic rate or some other rate, equal to the tax deducted. This will make the Gift Aid scheme suitable for many more donors who pay income tax at a rate below the basic rate, or who pay capital gains tax.

3. The Clause will also extend higher rate tax relief, so that it applies not only to income tax, but also to capital gains tax that the donor pays.

4. The Inland Revenue will make regulations in the summer providing for Gift Aid declarations to be given in writing, electronically through the Internet or orally. A declaration will be able to cover a one-off gift to a charity or any number of gifts, for the future, or retrospectively.

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5. Subsection (1) provides for Section 25 Finance Act 1990 to be amended. That section contains the Gift Aid provisions.

6. Subsection (2) substitutes the term "an appropriate declaration" for "an appropriate certificate" in subsection (1)(c) of Section 25. This change reflects the widening of the legislation to allow declarations to be given orally and electronically, as well as in writing.

7. Subsection (3) amends subsection (2) of Section 25, which sets out the requirements for a donation to qualify as a Gift Aid donation.

8. Paragraph (a) of subsection (3) repeals paragraphs (c) and (g) of Section 25(2). This will allow covenanted payments to charity to come within the Gift Aid scheme and will abolish the minimum limit of £250.

9. Paragraph (b) of subsection (3) deletes wording in paragraph (e) of Section 25(2) referring to the limit (of 2.5% of the amount of the donation) on the value of benefits that donors could receive in return for their donations. It replaces it with a reference to new subsection (5A), which contains the revised limits for donor benefits.

10. Paragraph (c) of subsection (3) replaces paragraph (i) of Section 25(2), which required a donor to be resident in the United Kingdom at the time of the donation, with new wording. The new paragraph (i) requires that:

• the donor be resident in the United Kingdom or

• the donor be performing duties which are treated as being performed in the United Kingdom under Section 132(4), Income and Corporation Taxes Act 1988 or

• the grossed up amount of the donation (i.e. the donation before deduction of income tax) to be paid out of profits or gains brought into charge to tax.

This will allow Crown servants and members of the UK armed forces serving abroad, and non-residents with income or gains brought into charge to tax in the United Kingdom, to use the Gift Aid scheme.

11. Subsection (4) substitutes new subsections (3) and (3A) for the existing subsection (3) in Section 25. New subsection (3) gives the Board of Inland Revenue powers to prescribe in regulations the manner in which the "appropriate declaration" in subsection (1)(c) should be given and the information and statements to be contained in the declaration.

12. New subsection (3A) provides that regulations made under new subsection (3) may provide for the circumstances when declarations shall have effect, and for the records that a charity must keep. New subsection (3A) also provides that the regulations may prescribe different rules for declarations made in a different manner.

13. Subsection (5) inserts, after Section 25(5), new subsections (5A) to (5G).

14. New subsection (5A) sets out the limits for the donor benefits, relative to the amount of the donation, for the purposes of subsection (2)(e). That subsection makes it a condition for a donation to be a Gift Aid donation that the donor benefits do not exceed the limits in new subsection (5A). The new limits broadly reflect the limits that exist under the existing Deed of Covenant and Gift Aid schemes.

15. New subsection (5B) provides for the annualising of the value of certain benefits and the amounts of certain donations for the purposes of the limits in new subsection (5A). Where a benefit received in consequence of making a donation:

• is a right to receive benefits at intervals over a period of less than twelve months or

• relates to a period of less than twelve months or

• is one of a series of benefits received at intervals in consequence of making a series of donations at intervals of less than twelve months

the value of the benefit will be adjusted for the purposes of subsection (4) (relevant value of benefits) and the amount of gift will be adjusted for the purpose of new subsection (5A).

16. New subsection (5C) provides that where a benefit, not one of a series, is received in consequence of making a donation which is one of a series of donations made at intervals of less than twelve months, the amount of the donation will be adjusted for the purposes of new subsection (5A).

17. New subsection (5D) provides the calculation for annualising the value of the benefit or the amount of the donation, when required by new subsection (5B) or (5C).

18. New subsection (5E) disregards, for the purposes of the donor benefit rules, the right of admission to view property or observe wildlife, where the preservation of that property, or the conservation of that wildlife, is the sole or main purpose of the charity. There is a proviso that the opportunity to obtain such benefits must be open to all members of the public.

19. New subsection (5F) defines a charity for the purposes of new subsection (5E) as one whose sole or main purpose is the preservation of property, or the conservation of wildlife, for the public benefit.

20. New subsection (5G) defines a right of admission, for the purposes of new subsection (5E), as admission for the donor or any member of his family either free of, or for a charge below the normal charge for admission for members of the public. The provisions in new subsections (5E) — (5G) reflect the provisions in Section 59 Finance Act 1989, which applied to covenanted payments.

21. Subsection (6) replaces subsections (6) to (9) of Section 25 with new subsections (6), (7), (8), (9) and (9A).

22. New subsection (6) provides, in paragraph (a), that, for the purposes of income tax and capital gains tax, a Gift Aid donation is to be treated as paid after deduction of basic rate tax and the donor's basic rate band for the year is to be increased by the grossed up amount of the donation (i.e. the donation before deduction of income tax). This will ensure that a donor who pays higher rate tax gets higher rate tax relief on the grossed up amount of the donation, whether against income tax or against capital gains tax. Paragraph (b) applies the provisions in the new subsection (7) as if the tax treated as deducted from the donation were tax which the donor is entitled to charge against another person. Paragraph (c) provides that the donor's entitlement to personal reliefs shall be restricted, where necessary, in order to ensure that he pays an amount of income tax and capital gains tax equal to the tax treated as deducted from the donation. The increase in the basic rate band will not apply for the purposes of computing relief under Section 550(2)(a) or (b), Income and Corporation Taxes Act 1988.

23. New subsection (7) sets out the provisions mentioned in new subsection (6)(b).

24. New subsection (8) provides that where the donor has not been charged with an amount of income tax and capital gains tax equal to the tax treated as deducted from the donation he can be assessed, at the basic rate, to recover the shortfall.

25. New subsection (9) sets out certain charges, reliefs and set-offs to be disregarded in calculating the total amount of income tax and capital gains tax charged on the donor for the purposes of new subsection (8).

26. New subsection (9A) provides that, for the purposes of the income limit in Sections 257(5) and 257A(5) Income and Corporation Taxes Act 1988, above which the age-related personal and married couple’s allowances are gradually withdrawn, , the donor's income is to be treated as reduced by the grossed up amount of the gift.

27. Subsection (7) repeals subsection (12)(b) and (e) of Section 25.

28. Subsection (8) inserts a reference to section 25(6)(c) Finance Act 1990 after "section 256(2)(b)" in subsections (1)(b) and (3)(b) of Section 257BB, Income and Corporation Taxes Act 1988. This prevents the restriction of personal allowances in the new Section 25(6)(c) from adversely affecting the amount of surplus Married Couple’s Allowance available for transfer to a spouse.

29. Subsection (9) inserts a reference to section 25(6)(c) Finance Act 1990 after "section 256(2)(b)" in paragraph 4(1)(b) of schedule 13B, Income and Corporation Taxes Act 1988. This prevents the restriction of personal allowances in the new Section 25(6)(c) from adversely affecting the amount of surplus Children's Tax Credit available for transfer to a partner.

30. Subsection (10) applies the section to payments made on or after 6 April 2000 which are not covenanted payments and to covenanted payments falling due on or after 6 April 2000. It also provides for regulations under the new subsection (3) of Section 25, made within three months of Royal Assent, to have effect from the same dates.

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31. The present Gift Aid scheme is designed for large one-off donations to charity. There is no maximum limit for donations, but there is currently a minimum limit of £250. Millennium Gift Aid is a special form of Gift Aid for donations to charities working on education and anti-poverty projects in the world’s poorest countries or helping Kosovan refugees. The minimum limit for Millennium Gift Aid donations is £100, and donations can be paid in instalments. But that scheme is time-limited — donors must make their £100 donation by the end of December 2000. No changes are proposed to the Millennium Gift Aid scheme. The Deed of Covenant scheme has existed for many years. Donors enter into a legally enforceable commitment to make regular donations to a charity for a period exceeding three years. There is no minimum or maximum limit for donations.

32. Gift Aid, Millennium Gift Aid and Deeds of Covenant, all work in a similar way. The amount paid by the donor is treated as a ‘net’ amount after deduction of basic rate income tax, which the charity can claim back from the Inland Revenue. Donors who pay income tax at the higher rate can claim higher rate tax relief in their tax return (at the difference between the higher rate and the basic rate). Donors who pay income tax at a rate below the basic rate, or who pay no income tax at all, must pay basic rate income tax in respect of their donation so that, overall, the correct amount of tax relief is given.

33. There are currently different rules for Gift Aid and Deeds of Covenant for the level of benefits that donors can receive without disqualifying their donations from tax relief.

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