Expert advice

Surviving a gift aid audit

Finance | 8 Mar 2011

Peter Lennard recounts the horror of an HMRC gift aid inspection and offers some tips on how not to get caught out.

Anyone who is about to see the JB Priestley play ‘An Inspector Calls’ should look away now. For those of you who have seen it, the inspection we had (three years ago now) still haunts us to this day. The inspectors were actually called ‘auditors’, but don’t be fooled.

Advance notice

First of all, you will get notice. We had a phone call just over four weeks before the audit in order to arrange a convenient date. This is followed by a letter which sets out the list of documents required to be available and the claim period which they are going to audit. Two days were allocated for the audit, but only one was needed in our case. We were given verbal feedback on the day and this was followed a month later by a letter with the findings.

Documents required

We thought the main objective of the audit would be to follow through the audit trail from the gift aid claim to the list of donors and then through to the actual donations appearing on our bank statements. The main documents (listed in their letter) were:

• gift aid declarations (including copies of written records sent to donors making oral declarations).
• statements, paying in book stubs and cheque book stubs for all bank accounts.
• cash books, donation spreadsheets or register of payments, any other index or register of gift aid donors and payments.
• specimen copies of the gift aid declarations forms used.
• any correspondence connected with tax-effective donations.
• copies of any literature used by the charity to promote tax-effective giving.
• any other records used to compile the claims. 

We thought our current records were pretty good, and in fact the auditor’s feedback letter said “evidence of receipt and banking was available for all donations and I was able to confirm full audit trails for all payments sampled”. Phew! My understanding from discussions with other charity finance professionals is that this is not always the case and the lack of traceability sometimes results in ‘rich pickings’ for the auditor.

Preparation

In our case they selected a month as the period of inspection, and we went through and checked all the records for the period selected. Bearing in mind that you will not have time to make any restitution for any errors found, it is very good practice to make a note of any errors you have found and advise the auditor when he arrives. The chances are that the auditor will find the errors anyway if you don’t declare them, and owning up to errors will help you if you end up having to negotiate some form of extrapolation with the auditor.

Errors found

So what did the auditor find when he looked through our records? As I said earlier, fortunately he was able to trace transactions right the way through  from the donor record to the individual banking on our bank statements. However, the first error which he found was that some of the entries on the sponsorship forms for which we had claimed gift aid were incorrect. Our sponsorship form has a column to be ticked by the sponsor headed “Treat as gift aid”.

However, three of the donors who had ticked the gift aid box were limited companies, one did not supply the full name, eg just “Mrs Bloggs”, and two of them had first names only (eg Fred and Freda). The error rate of these sponsorship gift aid errors was calculated by the auditor by value. We then had the option to either extrapolate the error back to all sponsorship claims from 6 April 2000 or go through all our records back to 6 April 2000 and recalculate the claims. Either way, we were required to make a payment on account in order to avoid interest. As we were not confident of our sponsorship records in the earlier years and the amount was relatively small, we decided to go for the extrapolation option for this error and made a payment on account. Also, as we had over-claimed in error, we didn’t feel too bad about repaying this money. 

The second error was one input error where £80 gift aid had been claimed instead of £50. As it was a one-off we were just allowed to repay the tax as claimed.

That didn’t sound too bad, did it? Wait for the sting in the tail…

One of our fundraising team had designed a new leaflet to go out to individual households to encourage donations and claim gift aid on the donations. The donation form included a box:

Looks OK, doesn’t it? Unfortunately, in trying to find space for all the appeal and payment information, what was left out was: 

In the month audited, the auditor found 40 per cent (by quantity) on wrongly worded paperwork. (We are not sure why they chose to calculate the error rate by value for sponsorship but by quantity for donations.) In addition, HMRC had announced on its website that from November 2005 there would be no more amnesties for invalid declarations. So we had the choice of losing 40 per cent of our donations for the last six years, amounting to several tens of thousands of pounds, or doing a full review by going back and getting valid claims. 

We chose the latter, firstly because of the large amount involved, and secondly because we felt that this would also secure future claims, ie we would not have faulty declarations against gift aid claims going forward. We asked for six months to do this and HMRC agreed to hold this in abeyance for three months and review the progress then. 

We then took on a large number of volunteers to go through all individual gift aid files to find declarations with the wrong wording, then see if we had a valid declaration from another appeal and then, if not, write to the individuals asking them to complete new forms and explaining the reason. We had to do a second follow-up for those who did not respond the first time round, but we were able to reduce the repayment to HMRC down to the equivalent of about one month’s gift aid. 

After the three months we wrote to HMRC explaining what we were doing, and because they were satisfied that we were carrying out a thorough cleanse of the records, they agreed to extend this period. It did actually take about six months to get to the point where we had exhausted all the avenues to get revised declarations.

Lessons 

• When you are given a date, check all the transactions for the period to be audited and  own up to errors.
• Review the wording on forms now. If they are wrong, check if you have another valid declaration for the same donor and if not, get new declarations. There are model declarations on the HMRC website.
• Look at the HMRC website regularly.
• Check the names on the sponsorship forms.
• Check that you have a full audit trail back from the gift aid claim through to the banking of the donation.
• If you haven’t done so already, as soon as you are advised of the HMRC gift aid audit, scan through the HMRC website section on gift aid.

DIY audit 

At the time of this gift aid audit, we were considering the introduction of internal audit within our organisation, and subsequently decided to employ a firm of outside internal auditors. As part of the rolling internal audit programme, we ask them to look at gift aid every three years and carry out an audit trail on a sample of transactions. If you don’t have an internal audit function, then I would recommend that you just take a few samples and make sure that you can follow the gift aid claim right through to the appearance of the donated money on your bank statements. 

As you can see it was a fairly traumatic six months for us, and now, of course, there is gift aid through shop donations, but that’s another story…

What’s happened since... 

About a year after our audit, and following consultation on gift aid, HMRC relaxed slightly the rules on extrapolation and introduced de minimis values. First of all they will now accept that where charities can repair errors identified in a population within an audit sample, they will extrapolate on the repaired error rate across the population rather than on the error rate found in the first instance. Secondly, they introduced a de minimis and ‘yellow card’ system for which they will only extrapolate back six years if the repaired error level is more than 4 per cent and the amount at stake is more than £500.

Peter Lennard is director of finance at Dorothy House Hospice Care

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Directory: HM Revenue & Customs (HMRC)