Gift aid loophole vital for charities

When you’re in government and you start messing with charity finance you’d better watch out. As fatigued as the general public may be by constant demands for charitable giving, what they really don’t like is when the government starts laying down the law on charities and the taxes they pay. It’s simply bad for business.

And what’s bad for government PR right now is its insistence that charities should not use gift aid to claim tax back on day memberships.

This has sent shockwaves through the charity world. Both the Eden Project and the Royal Horticultural Society – organisers of the recent Chelsea Flower Show – have officially complained. The scheme is also used by high-profile attractions such as London Zoo and Kew Gardens.

A letter from the managers of the Eden Project to chancellor Gordon Brown was emphatic: ‘We did not rush into this scheme unadvisedly. Naturally we followed the Inland Revenue’s guidance and have had discussions with its representatives nationally, and locally, to ensure we were going about things the right way. It was the Inland Revenue, after all, which said it quite clearly in its guidelines that “a donation for free admission can be gift aided”.’

That guidance points to something else – a clash between the Revenue’s laid-back advice to charity managers and the Treasury’s sudden realisation that, if used widely, gift aid could cost the public coffers a considerable amount of money.

But to cost the Treasury a great deal, the scheme would have to be exploited more widely. One current estimate is that the Exchequer would lose out by only £10m.

It’s worth putting that figure into the context of government revenues. The government’s red book shows expected revenues of £35bn from corporate tax for 2004-05. Of that total, £10m would make up less than 0.1%.

It’s easy to see why charities are so perplexed if the Treasury has indeed turned against day memberships.

That said, tax-efficient day membership do not appear to have been the government’s intention – even if it was cleared by the Revenue.

Gift aid was intended to increase charitable donations through tax-efficient ‘annual memberships’. At some point, the charities started applying the scheme to day memberships, which the Treasury believes are simply entrance fees by any other name.

In a letter to the Eden Project, John Healey, economic secretary to the Treasury, wrote: ‘While gift aid is designed to promote giving to charity by individuals, these schemes do not generate additional giving, but simply reclassify admission fees as donations on which gift aid is being claimed.’ In other words, it’s just a tax dodge.

For every pound a charity receives in day membership, it can reclaim 28p worth of its tax liability. At that rate the benefits can soon mount up – especially for a popular attraction.

But the fact remains that the government may be right. Experts believe that Gordon Brown’s willingness to say something in last year’s pre-Budget report, and the start of a fresh consultation, means the chancellor is fairly serious about sticking to the letter of the law – regardless of the Revenue’s interpretation.

But that leaves open the question of how charities should be treated under current tax law. Observers may argue that the basic principles for charities are hazy and ill-defined – and the current deadlock over gift aid only serves to support that theory.