The gift aid claimed by a charity on a supporter’s donation will be counted by HMRC as contributing to the donor’s own tax relief in assessing whether the donor has reached the new tax relief cap, the government has confirmed.

The Treasury yesterday published its clarification note on the tax relief cap announced in the March Budget. The cap will limit the amount of income tax relief that individuals can claim to 25 per cent of income with gift aid, or £40,000 with gift aid, whichever is greater.

The sector was hoping that the note would provide detail on how the cap would be implemented and what it would mean for charities. But it did not find much favour.

Karl Wilding, head of research and policy at the NCVO, tweeted: “The most unhelpful clarification document ever written…Desperately disappointing” and “nice to see HMT’s utter failure to distinguish between personal gain and public benefit”.

No impact on charities' gift aid claims

The note states that the cap will not impact on the tax claimed by charities under the gift aid scheme. However, it does make clear that the limit will apply to the gross donation, not the net donation, meaning the cap will affect gifts above £40,000, not £50,000 as previously assumed.

It goes on: “The grossed up donation (that is the donation made by the donor plus the tax reclaimed by charities) will be taken into account when assessing whether an individual donor has reached the cap.

“If the cap has been reached the donor will receive no tax relief on the grossed up donation above the cap and, as now, the donor will need to have paid enough tax to cover the tax repaid to the charity.”

But Charity Tax Group said it already knew these details.  Chair John Hemming (pictured) told civilsociety.co.uk: “This is something we clarified on the day of the Budget.  Charities’ ability to claim gift aid will not be affected, but it may impact on what the donor gives in the first place.

“What we are still trying to find out is, if a charity has claimed back tax on an amount that is in excess of that donor’s limit, how is that excess to be treated? Somehow or other that individual will have to cover that tax liability. Is it to be apportioned between the different reliefs or will charities get priority? We need to know in what order that liability will be allocated, because there are circumstances where it will impact on the donor.

“We want to fill in all these gaps before they publish the consultation so we can talk on a knowledgeable basis,” he said.

Hemming added that CTG still supports the position that “charitable donations should not be capped, and the specific whys and wherefores of this new legislation must not distract from this basic message”.

Government’s rationale for the cap

The note also reinforces the government’s motivation for the policy: “This government believes it is not right that taxpayers with very high incomes should, year after year, pay little or no tax as a result of unlimited reliefs.”

It goes on: “Other countries already restrict tax reliefs. For example the US caps the income tax relief available for charitable donations, and there is a presumption that all taxpayers should contribute to government costs. In the US, it is not possible to reduce income tax bills to zero by making donations to charity, as is currently possible in the UK.”

The Prime Minister reiterated this explanation when asked about the cap at the launch of Big Society Capital this morning.  He said the government was committed to supporting philanthropy but it couldn’t be fair that some of the highest earners pay no income tax, and he cited the US comparison.

However, Cameron also emphasised that there will be a full consultation on the policy before it is implemented.

The note concludes: “Whilst the government has decided that unlimited income tax reliefs, including charitable reliefs, should be capped, it is committed to exploring with the philanthropy and charity sectors ways to ensure that this change does not significantly impact on charities which depend on large donations. A consultation document will be published in the summer.”

The full note can be read here.