Lord Newby
My Lords, the gift aid small donations scheme was announced as part of a package of measures to encourage charitable giving in the 2011 Budget. It is a complementary scheme to gift aid, which, as noble Lords will be aware, is one of the main tax reliefs available to charities and their donors and is now worth more than £1 billion per year to the charity sector.
The Government recognised, however, that charities were missing out on a significant amount of potential gift aid income because it is not practical for them to collect gift aid declarations from passers-by in the street or members of a congregation who give small cash donations. This Bill, therefore, enables charities to claim a gift aid-style top-up payment on those small cash donations without the need for a gift aid declaration. Most charities will be able to claim top-up payments on up to £5,000 worth of small cash donations in a tax year. This means that they will have up to an additional £1,250 of income each year to help advance their charitable purposes. This is a significant boost to the charitable sector, which will particularly help small and grass-roots charities. Her Majesty’s Revenue and Customs estimates that this scheme will be worth approximately £100 million in additional funding to the sector each year once the scheme is fully up and running.
In constructing the scheme, the Government have had to strike a balance. The scheme must be fair and affordable, and it must be protected from fraud. Unfortunately, all repayment schemes attract fraud. HMRC already experiences fraudulent claims for gift aid—which is a more secure system than the new scheme will be—because charities have to keep more records of their gift aid donations. The gift aid small donations scheme is cash-based, so there will be only a limited paper trail. That means that it is highly likely that some fraudsters will be attracted to the new scheme, so it has been necessary to put some safeguards in place.
First, a charity must have had at least two years of a good gift aid track record with HMRC and have made successful gift aid claims in at least two out of the last four tax years. This will allow HMRC to get a good picture of a charity’s ability to claim gift aid correctly.
Secondly, charities and community amateur sports clubs must also claim gift aid alongside any claims for top-up payments under the gift aid small donations scheme. This means that a charity will need to successfully claim on traditional gift aid donations worth at least 10% of their claims under the new scheme in the same tax year. For example, to claim top-up payments on £5,000 of small donations, a charity must also claim gift aid on at least £500 of other donations in that year. This matching requirement allows HMRC to monitor the continuing compliance of the charity. The new scheme is designed to be light on paperwork, so it will be difficult for HMRC to comprehensively check whether a charity is compliant. So the ability to check the gift aid claimed by the charity gives HMRC a reasonable proxy to ensure that the charity is also claiming correctly under the new scheme.
Following representations in another place that the eligibility criteria were too strict, the Government tabled amendments that have reduced the matching condition from a minimum of 50% of gift-aided donations to 10%. The Government also agreed to reduce the eligibility criteria to claim under the scheme. A charity may become eligible to claim under the scheme after two complete tax years instead of three. In addition, instead of maintaining a gift aid claims record in at least three years out of seven, charities will need to claim in only two years out of four. These changes make the scheme more accessible, increasing the number of charities that can benefit and reducing the burden placed upon them.
As well as being accessible and protected, the scheme is designed to be fair. The Government recognised that an allowance of £5,000 per charity would have significantly inequitable results for some charities. Charities that perform similar activities are often structured differently for historical reasons. That means that, if every charity received this £5,000 allowance only, some charities could claim many hundreds—if not thousands—of times more in top-up payments than others. For example, every parish church in the Church of England is a charity, while the Roman Catholic Church is structured with a charity at diocese level, with some 200 parish churches forming part of each charity. Without special rules, the Church of England would have been eligible for many hundreds of times more claims under the scheme than the Catholic Church.
For this reason we have introduced the community buildings rules. These enable charities to claim an extra £5,000 allowance if they conduct charitable activities in a community building and meet certain other criteria. Charities that meet the criteria will be able to claim an extra £5,000 worth of small donations for each building in which they carry out charitable activities. HMRC will be issuing guidance to help charities understand the legislation and whether it applies to them. For charities that are unsure of their status, HMRC will be happy to give bespoke guidance.
This Bill represents a boost to the charitable sector by enabling charities to claim new top-up payments on small donations where it is currently difficult or impossible to collect the necessary paperwork for gift aid to apply. I commend the Bill to the House.
Lord Newby
My Lords, I am extremely grateful to all noble Lords who have spoken in this debate. I am very pleased that we decided to postpone the Leveson debate because if we had not there would be about 50 people grumbling at the fact that I will now attempt to answer the questions that speakers in the debate raised.
One concern everybody has raised is about whether the scheme is too difficult to administer and overbureaucratic, to which there are several answers. The key thing is that, at one level, it is very straightforward to operate. Charities are already filling in forms for gift aid. Under the scheme they simply have to tick a box to say that they want to claim additional cash under this additional scheme and they will get it. They do not have to fill in another form. If they are operating out of a community building, they have to give the address of the building. We are not talking about a long and hugely complicated form at all. It is very straightforward. That is one of the key things that HMRC is trying to do. It has to strike a balance between something relatively simple and something that is not open to fraud.
I confess that I started my professional life working in Customs and Excise, helping to devise schemes to help small shopkeepers account for VAT. There was a particularly assiduous Scotsman in our group who spent all his time in a corner trying to work out how shopkeepers could defraud Customs and Excise. We ended up with really quite complicated schemes as a result. They were designed to be simple, but because people were very worried about fraud—and you were talking about, as it were, real money then—we ended up with seven schemes which were designed to be simple but none of them was quite as simple as we had hoped. That is a danger of which HMRC have over the years become more aware, and why the scheme is designed to be as straightforward as possible.
Obviously, charities are not going to look at the Act, but at the guidance from HMRC. As a number of people have said, the guidance itself will be extremely difficult. HMRC is planning to produce two levels of guidance. First, a starter level will set out the rules as simply as possible; most charities will only need to use that, which will supplement the very easy form. Secondly, detailed guidance will explain how the law works to larger charities and charity representatives who want that degree of detail. HMRC will also help and advise charity representatives who want to develop their own guidance; we are thinking here possibly of the churches as an example.
A number of noble Lords asked about consultation with the charitable sector. HMRC undertook a public consultation on the detail of the scheme that ran from March until May this year. It was eight weeks long and 83 organisations and individuals responded to it. HMRC also held meetings with groups of interested people during the consultation period. It has been consulting on the detailed proposals with some charity representatives throughout the development of the legislation, including the Charity Finance Group and the Institute of Fundraising.
Over the summer, the Bill was used as a pilot for the public reading stage in another place. This is a new approach, a supplementary consultation stage where members of the public and organisations can give detailed comments on the draft Bill via the web. Sadly— I think it is rather sad—only 23 individuals and organisations responded to the public reading stage, and a number of them had already been involved in the consultation. It was a useful additional scheme, but whether or not it really added a huge amount is slightly doubtful.
The noble Baroness, Lady Hayter, and the right reverend Prelate raised the question of digital donations. The Government said in the Autumn Statement that we are examining whether the administration of Gift Aid can be improved to reflect new ways of giving money to charity, particularly digital giving. Obviously, young people in particular are going to give their money digitally; there is no doubt about that. As we are finding in many parts of legislation, the Government are, if anything, struggling to keep up with reality just as the digital revolution is changing the way we do everything.
We are starting this scheme with cash because we feel that that way we can make it work relatively easily, but we are going to look at digital giving and at digitising Gift Aid administration more generally. It is only a matter of time before we do all these things but, while people are currently worried about some of the complexities of the Bill, we are keen not to make them more complex at this stage and at least get going with straightforward cash donations.
Noble Lords asked about the publicity for the new scheme. HMRC is planning a four-stage publicity campaign over the next few months to alert charities to the new system and donation scheme. As well as media publicity, HMRC is planning to write in the new year to every charity that has claimed Gift Aid within the past three years to tell them about this scheme and about Gift Aid online. HMRC has also asked the charity representative bodies to help it spread the message.
The noble Baroness, Lady Hayter, asked me to commit myself to a review. The Government have committed themselves to a review. That is the good news. Sad to say, from the noble Baroness’s point of view, but entirely appropriately, the review is to be after three years. This is a relatively standard period for review after a scheme has come in and we definitely plan to do that. In the mean time, HMRC publishes national statistics on the cost of charitable tax relief three times a year. Once up and running, HMRC will publish details about the Gift Aid small donation scheme. These figures will be national statistics.
HMRC does not publish details of fraud rates, although as it received about £10 million of fraudulent Gift Aid claims last year, it is not an insignificant amount. Although, obviously, the last thing in the mind of the vast bulk of charities is fraud, there are people who will exploit any scheme if they think that they can do well out of it.
The noble Lord, Lord Hodgson, asked a number of questions. He asked about the detailed wording in the Bill on Clause 2(2), which refers to “2 consecutive … years”. Clause 2(2) does that because charities will need to make a Gift Aid claim at least every other year. The qualifying period is now two years, so it would be inappropriate to allow a charity a gap of two years or more in order to do so. I hope that that clarifies the position.
Baroness Barker
My Lords, could the Minister write to some of us to explain that point a little further?
Lord Newby
I would be only too pleased to write to all noble Lords here. Basically, it is the interaction of the general Gift Aid scheme and this particular element of it; but I will write to clarify that point absolutely.
The noble Lord, Lord Hodgson, asked again about the cost and whether HMRC would be proportionate, not heavy-handed, and efficient. He will not be surprised to hear me say that, of course, that is what HMRC plans to be. I hope it will be. My experience, working in HRMC—or Customs and Excise as it was—was that it did a lot of things extremely efficiently, and every now and then it did something which was less than efficient. It was the less-than-efficient examples which tended to get most of the publicity. I know that the relevant section of HMRC understands the point that the noble Lord is making. The Government are not setting up this scheme in order not to hand out the cash. We are setting up the scheme because we are very keen that it is successful and is able to help charities in this way.
The noble Lord asked about foundations and why they are in a position that is different from that of individuals. I am tempted to say, “Because they are not individuals”, but I will happily write to him with some of the background as to their tax treatment, which I absolutely understand is different from that of an individual.
He asked whether a two-year period was necessary, because a charity must already have been through the registration process, including the “fit and proper person” test. The test helps to ensure that charities, community amateur sports clubs and other organisations entitled to charity tax reliefs are not managed or controlled by individuals who might misuse the tax relief. Unfortunately, as I said earlier, fraudsters have been known to exploit charity tax relief, so the “fit and proper person” test exists to prevent that. However, even if a charity appears to be compliant in the first few years, changes in personnel can affect its attitude to compliance, so HMRC will need to continue to have evidence on which to base its assessment of the risk that the charity poses in relation to the scheme. That is why we have gone for a two-year qualification period. We believe that that gives an adequate protection against potential fraud, because people will have had to be up and running, making the thing work. Equally, it is not too long, which was the concern about the original proposals.
The noble Baroness, Lady Barker, asked specifically whether it would be possible under this scheme to collect funds and claim the gift aid from activities in housing association premises. To take a simple example, if the charity is a small local charity linked to a specific housing association and it wants to raise money from a collection in its premises or in a pub or anywhere else, it can do that. Things get more complicated if it is a branch of a large housing association—somewhat like a Catholic church—which wants to pray in aid the community building rules. In that case, because the housing association premises are essentially residential premises, it will not be able to do that, because that is the definition we have put in place.
That demonstrates that tax is complicated. There is no system we could have put in place that would have had any reasonable protection against fraud and which would not have run up against those kinds of complexities—and undoubtedly there will be anomalies. However, with tax, the choice before you is not whether you have anomalies but whether you do something or not. You are bound to have these anomalies. We took the view that putting in place a scheme that enabled charities to have access to £100 million was worth it, even though we knew that there would be some anomalies, because they come with the territory, as it were.
I believe I have answered the point that the noble Baroness, Lady Barker, raised about guidance to users. We are doing that on the various levels that she talked about. We have consulted, and will continue to consult, the standing body that HMRC has for dealing with the charity sector as a whole.
The noble Baroness made the very interesting suggestion of having a website, on which reports and a financial statement would be put. That is a possibility. I suspect that, if we had done that, someone would say that it was grossly unfair to small charities that did not have a website. However, given that we expect everybody in respect of benefits to use electronic communications, and that HMRC increasingly wants taxpayers to use them, it is not an unreasonable suggestion, and I am sure that my colleagues in HMRC will look at it.
The right reverend Prelate asked a couple of questions about simplicity and whether all the requirements were needed. As I said before, we had to take a view, and that view was that this struck the right balance between ease of access to the scheme and protection against possible fraud.
This debate has demonstrated that, if this were not a money Bill, we would be having extremely interesting discussions in Committee and on Report. Sadly, however, this is a money Bill. I therefore hope that I have been able to deal with the points that have been raised—
Lord Hodgson of Astley Abbotts
I did not hear the Minister address this directly but do I take it from the commencement date of the Act that Gift Aid under the new scheme will be available in the next financial year, starting 6 April 2013? Will it be in by then?
Lord Newby
My Lords, I believe that it will be but, again, if I am mistaken, I will include that in the letter that I have already committed to write to the noble Lord.
We have sought to strike the right balance between effectiveness, accessibility and security, and I believe that we have achieved that. The scheme will deliver an important new stream of revenue to the charity sector. I therefore commend this Bill to the House.