Donations

Donations

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I have picked up a new client who is a Self Employed Evangelist.  On working on his expenses, he has listed 'Donations' which come to around £7,000 to various charities both UK and Abroad.  The last three sets of accounts his previous accountant has prepared have included these donations in the expenses section of the income and expenditure.  On looking at the Self Assessments, he has also included these donations as expenses and not disallowed them..  I would normally enter donations under the 'Charitable Giving' section of the Self Assessment as Gift Aid payments for example, and not include them anywhere near his 'income and expenditure' statement,(thus increasing his higher rate tax starting band).  Am I missing something?  Or if the previous accountant has been doing this wrong, the last few yeas (by including these donation figures as expenses), this has created a loss to be carried forward, and no personal tax has been paid, oops.  I am going out to see the client tomorrow afternoon to go through the figures, before finalising the self assessment, and I don't think he will be a happy bunny if I give him duff information.  But any advice would be much appreciated.  Thank you.

Replies (12)

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Teignmouth
By Paul Scholes
03rd Jul 2014 22:32

Business gifts to charities

Subject to the general "wholly & exclusively" rule these can be treated as allowable expenses, see HMRC's BIM 

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By DMGbus
04th Jul 2014 08:22

Important question - gift aid

It is extremely important that the nature of the donations is ascertained before going any further.

Fundamentally were they Gift Aid donations or not?   I am absolutely certain that in the case of legitimate UK charities the donation's status as to an individual paying under Gift Aid arrangements or not would be ascertained / become known at the time of the charity receiving the donation.

If Gift Aid then absolutely NOT allowed as a tax deduction in the accounts - instead claim via main body of the tax return instead.   Ignoring this obvious potential error would result in double tax relief being obtained.

If NOT gift aid then an advantage that accrues is a reduction in Class 4NIC liabilities if the donations are passed through the P&L account provided that they  pass the test for tax deductibility against business profits.

 

 

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Replying to johnjenkins:
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By Carolynne
04th Jul 2014 09:15

Donations

Thank you for your reply.  As the clients donations are to UK and Overseas charities of a religious nature (due to him being an evangelist).  Some are well known big name types and others small local.  If they are NOT gift aid, I wonder if you could expand on the passing the test for tax deductibility against business profits?  Do you mean that 'providing it doesn't increase or create a loss.  As at present, to include these in the sole traders income and expenditure account, would create a £1,000 loss.  (The overall donations total £6,800).  If this is what you mean, would I reduce the donations by £1,000 so there is no loss, and just ignore the £1,000 altogether in the self assessment?  Many thanks.

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By chicken farmer
04th Jul 2014 09:30

Wholly and exclusively??

I can't see that  a payment can be a charitable donation (out of the goodness of his heart etc) and at the same time be wholly and exclusively for the purposes of his trade or vocation (ie, in order to earn profits). If there is duality of purpose then it is disallowable.

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By Carolynne
04th Jul 2014 09:43

Wholly and exclusively

He is giving the money as part of his faith encourages him to give a percentage of his income to the poor?  However the job he has is a job related to his faith and everyday he is working within these charity places in the UK and Abroad doing kind of missionary type work I suppose.

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By Carolynne
04th Jul 2014 10:03

HMRC View

I have just spoken with a Technician at HMRC and they have said that as a sole trader, it is NOT an allowable expense for tax purposes, unless it is Gift Aid which increases his higher rate tax bracket.. So now I am really confused. 

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Teignmouth
By Paul Scholes
04th Jul 2014 10:13

Not my understanding

Carolynne - see the link I gave you above and specifically:

For businesses subject to income tax, tax relief is potentially available via a deduction from trading profits (see above) or, if it is a cash gift, and the cost is not deductible against trading profits, the individual trader or partner(s) maybe able to obtain tax relief via Gift Aid instead.

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By Steve Kesby
04th Jul 2014 10:41

A agree with Paul, Chicken Farmer and DMGBus

As Paul says in his first post, a donation will be deductible from business profits if it is expenditure incurred wholly and exclusively for the purposes of the trade.

I agree with Chicken Farmer though that there will be few circumstances when a voluntary payment can be said to be expenditure incurred wholly and exclusively for the purposes of the trade though. It would normally be necessary for it to produce some positive publicity or other benefit for the trade to be said to be for the purposes of the trade, and it than still needs to be wholly and exclusively for those purposes.

If it doesn't qualify as a trade deduction and is to a registered UK or EEA charity then Gift Aid will be available, as per Paul and DMGBus.

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By Carolynne
04th Jul 2014 10:49

Wholly & Exclusively

Thank you Paul and Steve.  I have now got it straight in my mind with this one.  I believe the past accountant has wrongly been putting these donations through the Income & Expenditure account, as the donations are not Wholly and Exclusively for the purposes of business use.  I am now in a dilemma of knowing that perhaps the accrued losses aren't real.  If I bring them in, it will reduce his tax bill this year.  But really should the past be re-visited?

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By chicken farmer
04th Jul 2014 12:34

Carolynne

You ask whether the past should really be revisited - I think you know the answer and I am sure your client would wish to 'do the right thing'

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By Carolynne
04th Jul 2014 13:13

I Agree

Re the last two posts.  I concur that ethically there is an issue regarding the past.  Regarding the income he receives from various gifts and the gifts he then goes on to make, I agree that when I visit him this afternoon, I will have to explain that there is an area to discuss regarding whether some or all of these donations are allowable expenses, and that I won't be able to give a definitive answer today.  The previous sole trader accountant has Alzheimer's and I doubt I will be able to find out his reasons.  I will come back and post once I find out more information about it.  Thank you Basil for your wise words.  The charities he donates to are anything from the local church he attends, known named charities and ones I have never head of.  I will find out if there are connections to them.  For example I suppose if he gives to a charity, where he has gone out to minister to - there is a business connection as to why he would particularly give something to them, for example, it may be allowable. 

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By Carolynne
04th Jul 2014 14:53

Visited Client Today

Hi  I visited the client this afternoon, and discussed how we should proceed with the donations.  He explained that over half of the donations were to places he went to Evangelise - which were purely for business reasons of being an Evangelist as they bring him work.  The remainder are just personal 'givings' he makes to charitable organisations that he has nothing to do with business wise.    Based on this, and being given food for thought  by Basil today, I feel that I can now proceed with splitting the donations, so that some are disregarded and some are claimed.  However, as he will be paying a small amount of tax, he can let one of the charities he donates to, claim Gift Aid on the particular donation he gives to them, as the claim they would make, would fall into the taxable amount he is paying in the 2014 tax year. 

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