Tax-Effective Giving and VAT: What Fundraisers Need to Know

What is payroll giving?

Payroll giving is a scheme that enables employees to give to a charity straight from their gross salary (before tax is deducted). Any UK, EU, Norwegian or Icelandic charity that is recognised by HMRC for tax purposes can receive gifts this way.

Payroll giving allows UK employees to give more for less as the tax that would normally be paid to the government can be gifted to the charity too.

It allows the charity to receive reliable income to enable them to plan for the future and for employers to contribute to sustainable corporate social responsibility initiatives.  It’s also something that charities can do themselves - your fundraising team has the perfect opportunity to practice their approach with other employees before reaching out to new ones.

The individual (who must be on PAYE) decides on the amount and the charity/charities that should receive it, and informs their payroll department. The employer must have set up a relationship with a Payroll Giving Agency (PGA). PGAs are registered charities, regulated by HMRC, who receive the donations and transfer donations from employers to charities. For all information on how the tax relief works and how to set up a scheme go to HMRC.

For information on how to set up a scheme go to HMRC

How much does it cost the donor?

Because the donation is taken from your gross pay, every pound you give will only cost you 80p, or only 60p if you are a higher rate tax payer. The cost of setting up the scheme to the employer is minimal, as is the continued administration of the scheme. The PGAs take a small amount out of the donation to cover this cost. This is generally around 4-5 per cent or 25p of the donation.

For charities:

• Providing a reliable income stream
• Payroll donors are likely to continue giving for some time enabling charities to plan for the future
• Potential employer matching

For the donor:

• Tax effective
• No bank details required on sign-up
• Easy to set up and to maintain

For the employer:

• Improves Corporate Social Responsibility / raises Corporate Community Investment profile
• Boosts employee morale and sense of team-building (‘my company was responsible for donating a total of £xx to charity this year’) and, therefore, can aid staff retention
• Aids recruitment (increasingly, graduate applicants ask about the social responsibility and ethical profile of businesses)
• Any money the company gives is tax-deductible
• Can be awarded a Payroll Giving Quality Mark Certificate and become eligible to apply for the National Payroll Giving Excellence Awards

Can anyone help us recruit payroll donors?

There are a number of agencies known as Professional Fundraising Organisations (PFO) that are able to recruit donors on behalf of many different charities at the same time. They provide personalised materials, including websites and digital tools, promoting payroll giving for employers and charities, and have teams of expert fundraisers who can promote the scheme for employers across the UK.

PFOs do charge the charity a fee for their services, but it may be worthwhile if they are able to tap into income streams that your organisation may not otherwise have access to.

What are the Payroll Giving Quality Mark and the Excellence Awards?

The Payroll Giving Quality Mark and Excellence Awards celebrate the achievements of employers that have adopted and successfully promoted payroll giving schemes in their workplaces, and have enabled their employees to give to the charities that matter most to them.

The Quality Mark provides a benchmark of achievement; it celebrates good practice and recognises employers who operate exceptional schemes. Every employer that offers a payroll giving scheme to their employees is eligible to receive a Quality Mark. Employers that achieve certain benchmarks are eligible to apply for a bronze, silver, gold or platinum Quality Mark.

Employers who achieve a bronze, silver, gold or platinum Quality Mark are eligible to apply for a National Payroll Giving Excellence Award.

As well as donating gifts of money, individuals can also help your charity by gifting shares. This can provide you with a significant source of income and can also be very a tax-effective way for the donor to give. Individuals don’t have to pay tax on land, property or shares you donate to charity. This includes selling them for less than their market value. 

It is important to remember that when talking with a potential donor, you must not give financial advice and should encourage the individual to seek any advice they need from a qualified financial advisor.  

Individuals get tax relief on both:

• Income Tax
• Capital Gains Tax

For more information on donations of property, land, or shares go to HMRC.

Are we able to accept any gifts of shares?

All shares that are transferable can be donated to your charity, but only publicly quoted shares qualify for tax relief for the donor. Publicly quoted shares include shares listed on the London Stock Exchange or Alternative Investment Market shares (AIM). For a full list of qualifying stock exchanges, visit the HMRC website.

What should we consider before we decide to accept donated shares?

There are many factors to consider before making your decision. These include:

• Do you have a moral/ethical objection to holding shares from certain companies/industries?
• Do you transfer the shares yourself or get a broker to do it for you?
• What is your investment policy; do you keep the shares or sell them straight on?
• Is it worth your while to transfer the shares? Are there any burdensome restrictions?

We would recommend that your organisation has an agreed ethical policy in place that covers all these issues. If you cannot accept the shares for any of these reasons you may wish to look at the alternative methods to transfer shares listed below. 

To transfer the shares in paper form (certificates), the process is: 

1. Charity/donor obtains a stock transfer form from the Registrar of Shares
2. The form is received and filled out and signed by the transferring party
3. Return the completed form to the Registrar of Shares with original share certificate.
4. The charity will receive a new share certificate in their name.  

Stocks may however be held electronically, in either a corporate nominee account (administered by the registrar) or a stockbrokers nominee account (administered by a stockbroker). In those instances, you will have to contact the nominee in order to check their precise requirements for the transferal of the shares. 

You must advise the donor to keep a dated copy of the transfer form and to establish the value of the shares when they were transferred, so they can claim the tax relief. You can refer them to the relevant HMRC guidance notes for further information about the records they need to keep.

What to do if you don’t want to transfer the shares directly into the name of your charity?

As well as transferring shares as outlined, your charity can also:

• Open a charity account with Charities Aid Foundation – CAF offer services including the donation of shares
• Donate shares to ShareGift – a charity that specialises in accepting small donations of shares which aren’t worth selling on their own
• Donors can sell the shares themselves and then donate the proceeds to charity. There are of course different tax implications should they choose to do this. For more information, see the HMRC website.

There are a number of ways that businesses can support charities, and tax reliefs that can maximise the value of those gifts and act as an incentive for giving. 

What is the position for cash donations?

All companies can get tax relief when they give money to a UK, EU, Norwegian or Icelandic charity that is registered with HMRC but the relief works differently for companies, self-employed people and partnerships. 

When a company makes a donation, it gets tax relief by deducting the amount given from its profits and pays less corporation tax. This is called ‘Corporate Gift Aid’- although unlike Gift Aid given from individuals, charities do not reclaim any tax from HMRC.  

HMRC has further information and guidance on Corporate Gift Aid

Sponsorship

Sponsorship is a complex area for tax purposes for both charities and companies. A company can get a tax deduction for payments to sponsor charitable activities if they are also made for the purpose of the company. This might be a payment to get publicity for the company or its products that can be regarded as a reasonable value for the amount paid. The position will depend on the facts in each case.

Giving shares, property or land

Companies can claim corporation tax relief for gifts of recognised shares (other than those in their own company), land and property made to your charity. They can also claim relief if the gift is sold to your charity at less than the market value.  

Shares which qualify for relief are the same as those which qualify when they are given by individuals, subject to one exception – a company cannot give its own shares. 

The tax relief works in the same way as for individuals. Companies get the relief in addition to exemption from any capital gains made on gift. Companies should deduct the amount while working out their company profits in the accounting period in which the gift is made.  

When gifts are made by self-employed people or by partners in a partnership, the deduction is calculated in the same way as for individuals. 

Fundraising and charitable activity is, in general, exempt from the payment of VAT.  As a charity you don’t pay VAT when you buy some goods and services.

You must prove to the person who’s selling the goods or services to you that you’re eligible for relief.

You must register for VAT if your charity’s VAT taxable turnover (the total value of everything you sell that isn’t exempt from VAT) is more than £85,000.

You can choose to register if it’s below this, for example if you want to reclaim VAT on your supplies.

For all information on what VAT rates charities pay look at the information on HMRC’s pages.