Ian Clark outlines how payroll giving could be restructured within the gift aid system to make it simpler and more attractive.
In her recent blog Celina Ribeiro suggested the sector is sceptical that the Treasury and HMRC will make radical changes to the payroll giving system. I'm not so sure. I think this government understands that the current set-up is not sustainable or fit for purpose in the 21st century. I think it genuinely wants to create a better system. But for the last three years it has had other priorities, so has merely tweaked the current set-up with marginal improvements.
In the UK we have two main tax-effective giving channels - gift aid and payroll giving. One is pretty successful, with over ten million donors contributing about £1bn a year in tax refunds to over 60,000 charities. The other is a damp squib, with well under a million donors and yielding only about a thirtieth of the tax (about £30m a year), with only a few thousand larger employers and charities taking part and gaining any benefit.
The key problem with the current payroll giving system is that the direct link between an individual donor and the charity is broken. Several intermediaries get in the way: employers, payroll-giving agencies and professional fundraising organisations. Each has different paperwork, procedures and costs, which is very confusing for donors and employers. HMRC is barely involved, so the quality of service is very variable.
Take inspiration from gift aid
I wonder if one radical solution would be to take a leaf out of gift aid's book, and simplify the donor-to-charity link. Let's not reinvent the wheel, but rebuild payroll giving with the best existing features and processes from gift aid. For this blog, let's refer to it as 'Gift Aid Your Pay' (GAYP). For old fogies like me GAYP would stand for 'Gift Aid Your Pension'!
HMRC has just spent the last three years developing two new systems. The really major one is Payroll Real Time Information (RTI) to deal with PAYE/NI and the new Universal Credit on a monthly rather than annual basis. The other is Charities Online for tax refund claims for gift aid etc. Both new systems would play a major part in GAYP. Charities that haven't already registered with HMRC for gift aid would use Charities Online to register for GAYP.
For GAYP, the current employers' payroll-giving form would be revised to become a standard gift aid declaration, offering both regular monthly and one-off donation options. Because this form would be provided by employers rather than pre-printed by charities, HMRC will probably want the donor to enter the charity’s HMRC registration code, to ensure the correct charity is credited.
A donor-employee would complete the GAYP form, and the details would be entered into the payroll system. These details would be passed automatically to HMRC through RTI, and the gross gifts added to the tax and NI sent by the employer to HMRC. HMRC would check that the gift is eligible (ie the donor has paid sufficient income tax).
Once a month HMRC would total all the GAYP gifts received for a charity from different donors, and send it an electronic funds transfer and schedule of donors and their gifts. Charities would be able to thank donors far faster, particularly if the donor provided an email contact address. Donors could even elect to give anonymously if they wanted to.
Suddenly the old payroll giving landscape would be transformed. All taxpaying donors (workers or pensioners) could give directly from their monthly income through PAYE/RTI. Donors could give to whatever charity they wanted to provided it had registered with HMRC. Smaller charities - and even community amateur sports clubs – could join in and enjoy the benefits of regular monthly donations that most have been excluded from so far.
Reforming payroll giving within the gift aid regime must be attractive to the government, as it simplifies the need for new legislation and regulations. Only a minor change would be needed in the technical IT specification of RTI, which could be incorporated into the next scheduled version of the payroll software being used by employers. Payroll systems already process various gross payments to third parties (eg pension contributions).
Most taxpayers already understand and use gift aid, whereas most cannot even access the current payroll giving system. The same is true of charities. HMRC could even recoup the operating costs of processing the payments by levying a small fee – almost certainly less than the current payroll giving agencies charge.
The charity sector has asked the government to meet three key principles in any reform of payroll giving. HMRC’s own new RTI system already meets them:
- Universality – RTI already covers all PAYE employers, staff and pensioners
- Connectivity – HMRC could provide standard donor data direct to charities, without the need for third parties
- Portability – when staff move employers, RTI enables donor GAYP data to be transferred through HMRC
I'm sure there are other radical solutions for payroll giving out there that are even better or simpler than my GAYP brainstorm. Why don't you join in with your suggestions?
