Retail Gift Aid - claiming Gift Aid on donated items

• Charity Shops
• Gift Aid

In traditional circumstances when items are donated to a charity for fundraising purposes the value of these goods cannot be Gift Aided because Gift Aid can only be applied to cash donations. However if the charity can agree with supporters to sell goods on their behalf and then supporters donate the proceeds as cash this can be Gift Aided and add a further 28% to the income generated. The charity PDSA raised an additional £1m in two years simply by applying Gift Aid in this way.

This type of arrangement is known as 'Retail Gift Aid'. If your charity is thinking about using this type of arrangement for the first time, HM Revenue & Customs (HMRC) recommend that you contact them to discuss your plans before you implement them.

The following article is adapted from the guidance on the HM Revenue and customs website to explain the special circumstances surrounding claiming Gift Aid on donations realised from goods sold in charity shops and jumble sales etc.

Steps to Claiming Retail Gift Aid:

• Inform supporters about the Retail Gift Aid scheme, for example "If our charity sells the items on your behalf and you agree to donate the proceeds we can claim a further 28% on top this value through the Gift Aid scheme".
• The supporter agrees that you can act as an agent on their behalf to sell their goods. This can be agreed as tick box on your Gift Aid declaration form "I agree to x charity acting as an agent on my behalf to sell goods provided."
• Inform the supporter in the normal way about the rules of Gift Aid and get a Gift Aid Declaration
• Assign a unique Supporter ID to each supporter and add a label with their ID to each item for sale by them.
• When each item is sold with a Support ID on it you make a record of the amount it sold for against their name.
• At the end of a given period (say each month) you contact the supporter with the total amount all their items sold for and confirm that unless they state otherwise within 21 days you will treat the whole amount as a voluntary donation.
• Keep records throughout for audit purposes.
• Claim Gift Aid on the total amount now donated as a result of the goods sold.

Some general points to note: It would be a good idea to produce a Retail Gift Aid leaflet outlining the Gift Aid Rules and the finer points of the Retail Gift Aid Scheme. In this leaflet for example you can make the supporter aware of their own personal tax implications around selling goods. You will need to have administrative processes in place to track donated items against donors and to make sure all you staff and volunteers understand how the scheme works.

Carrying out the sale on behalf of the owner

In order for any eventual donation of sale proceeds by the owner to qualify for Gift Aid, your charity or CASC must be acting as an agent, selling goods on their behalf. The following rules must apply:

• The goods remain the property of the owner until they are sold. It must be clear that it's the owner who is selling the goods and not your charity or CASC - you're just acting as an agent on their behalf.
• The owner must have the right to keep all or part of the proceeds of the sale but can choose to donate all or part of the proceeds if they wish.
• Your charity or CASC must contact the potential donor after the goods are sold and offer to pay them the proceeds from the sale of their goods.
• The donor must make a Gift Aid declaration for any donations made.

You should ask the owner to complete a Gift Aid declaration before the sale (when they leave their goods with you, in anticipation of the proceeds being donated to you) - however the wording of the declaration mustn't commit them to making a donation.

HMRC recommends that charities or their trading subsidiaries selling goods on behalf of supporters should explain all of the arrangements in writing to the supporter. Where there is no written agreement, all staff and volunteers must be able to explain the nature of the arrangements, how Gift Aid applies, and the consequences for the supporter.

Contacting the owner after the sale

When the goods are sold you can then write to tell the donor how much the sale proceeds were and explain that you intend to treat the whole amount as a gift to the charity unless they contact you within 21 days to say they want to keep the proceeds.

You must then give them at least 21 days to respond to this letter before you treat the proceeds as a donation to your charity. You must clearly explain the process to the donor before the goods are sold.

Example 1: Emma brings a bag of clothes to a shop run by a trading subsidiary of a charity, and agrees that they can sell all the goods on her behalf. She completes a Gift Aid declaration naming the charity represented by the shop. The shop staff explains the process and tells Emma that she is under no obligation to donate the sale proceeds. They also make a list of all the saleable goods and the suggested prices and as each item is sold the actual sale value is noted on the list (the shop links particular goods to the supporter via a unique code on the price tag).

At the end of the month, the shop writes to Emma to tell her the value of the sales to date and asks her to contact the shop's head office within 21 days if she wants to keep any of the sale proceeds.

Emma is happy to donate all the proceeds to date to the charity - there is no need for her to write back because at the end of the 21 day period the shop can assume that she is donating the proceeds. After the 21 day default period, the subsidiary company passes the donation to the charity which includes that sum in its Gift Aid claim. The process is repeated each month until all of the listed goods are sold.

What records you should keep

For audit purposes, your charity or CASC must keep a record of the proceeds of the sale being offered to the donor along with their decision to donate them to you.

This could include:

• a copy of any written agreement with the owner to sell the goods on their behalf
• any documentation to show that the owner has been notified of the sale proceeds and that they have been given the opportunity to receive all or part of the proceeds - this is essential for the donor's own tax records
• any documentation from the donor confirming their donation to your charity or CASC
• internal accounting records to show how the goods are identified as belonging to a particular owner
• in the case of a trading subsidiary of a charity - records to show how the sale proceeds are remitted to your charity or CASC

Tax implications for your charity or CASC

Even in situations where your charity or CASC can reclaim Gift Aid, you may have other tax obligations.

Tax on trading activities

Your charity or CASC may be liable to pay tax on the profits of any trading activity. However, the sale of donated goods by a charity or CASC is generally not regarded as a trade for tax purposes, and the profits won't be liable to Corporation Tax or Income Tax.

If goods are sold on behalf of a third party (the potential donor) in return for a commission, your charity or CASC is providing a service in return for payment. That service is a taxable trading activity and any profit is potentially liable to Corporation Tax or Income Tax.

Any commission paid to your charity or CASC by the owner can't qualify for Gift Aid, as it is a payment in return for services, not a gift.

Tax on the costs of selling goods

All costs incurred in selling goods, for example advertising costs or insurance cover for valuable goods - including any share in overheads - is considered to be a non-charitable expenditure, and may affect your charity or CASC's entitlement to tax exemption.

Your charity or CASC may want to consider using a subsidiary company to act as the selling agent so that charitable funds are not put at risk. If the subsidiary company makes any profits it can pass these to your charity or CASC and claim a deduction against its taxable profits.

Example 2: Mary asks a charity to sell some jewellery worth £100 on her behalf. The charity explains the process and tells Mary that she is under no obligation to donate the sale proceeds. The jewellery sells for £250, the charity notifies Mary of the proceeds and she decides to donate all of the money to the charity. As this is a voluntary donation it qualifies for Gift Aid.

Although the charity is not technically trading, it spends £30 on advertising. As this is classed as non-charitable expenditure, it could affect the charity's entitlement to tax exemption as a subsidiary company wasn't used.

The trustees will need to be able to demonstrate that the likely overall proceeds (Gift Aid donations) are reasonably expected to exceed costs.

VAT implications for your charity or CASC

If you sell goods on behalf of somebody else and you don't charge them a commission you are not carrying out a business activity for VAT purposes (as you are doing something for no charge). This means that you can't recover any VAT you are charged on your costs, including overheads, relating to this activity of selling goods on behalf of others.

If you do charge a commission for selling the goods, you are carrying out a business activity and this commission income will need to be taken into account when considering whether you are liable to be registered for VAT.

Even if you are not paid in money - for example, you may instead receive some goods or services in return for selling the goods for the individual - this may still be a business activity on your part.

If you are VAT registered you will have to account for VAT on your commission charges. You will, however, be able to recover any VAT you are charged on costs relating to the sales of the goods on behalf of others, subject to the normal VAT rules.

Example 3: John asks a charity to sell a painting on his behalf and completes a Gift Aid declaration. John is told that there is no obligation to give the proceeds to the charity but the charity does charge a 5 per cent commission for handling the sale. The painting sells for £1,050. John tells the charity to take the commission of £50 out of the proceeds and keep the balance as a donation. The charity can claim Gift Aid on £1,000 but not the £50 commission fee.

As the charity is registered for VAT it must account for VAT on the commission fee as it is a charge for a taxable supply of services.

Tax implications for donors

The income generated from the sale of goods by your charity or CASC may have tax implications for the owner. You must make potential donors aware that:

• the amount of their donation which qualifies for Gift Aid is the net proceeds - the amount after any sales commission is taken off - which they agree your charity or CASC may keep
• if they sell significant quantities of goods in this way or are trading separately (as a sole trader) in those or similar goods they must consider their own position in terms of Income Tax and VAT on the proceeds even though they may donate them to the charity
• in the unlikely event of a purchaser seeking recompense in relation to goods purchased, this will be their responsibility rather than that of your charity or CASC

Capital Gains Tax

You should also make potential donors aware that if they sell assets in this way, a charge to Capital Gains Tax can arise, depending on the nature of the asset and how much it is sold for. Any liability to Capital Gains Tax is still their responsibility.

The owner may want to consider whether it is more beneficial for them to give a valuable asset directly to your charity or CASC instead - as they will not be charged Capital Gains Tax on any chargeable gains on gifts of assets to charities or CASCs. In this case your charity or CASC will not be able to claim Gift Aid on their donation - as Gift Aid only applies to gifts of money and not assets, but any gain on the sale of this asset by you will be exempt from Capital Gains Tax as long as the gain is applied for charitable purposes.

Contacting the HMRC Charities Helpline

For more help you can contact the Charities Helpline on Tel 0845 302 0203 (open from 8.00 am to 5.00 pm, Monday to Friday). Select option 6 for Gift Aid.

http://www.hmrc.gov.uk/charities/gift_aid/rules/retail.htm