Gift Aid: Right first time or wrong forever
Gift aid carry-back claims must be completely correct or they will fail completely. Whether such a mistake in a tax return is “careless” for penalty purposes depends on its nature and the potential consequences.
The unfortunate case of Allan Firth Webster  EWHC 2275 (Ch) and his gift aid claim throws a harsh light on how the slightest error can scupper well-meaning and innocent attempts to benefit charity.
Not only did Webster lose the benefit of gift aid for the year in which it would have benefited him most, he also had to make up the tax reclaimable by the charity and was hit by a penalty for careless error.
How did this happen?
The mistake Webster made was simple, but catastrophic and made in understandably distressing circumstances.
The year 2016/17 was eventful and tragic for Webster: he sold his business and lost his wife. In her memory he established a charitable trust and on 4 August 2017, the first anniversary of her passing, he donated £800,000 to the trust. He intended to carry back this donation to be treated as made in the preceding tax year under Income Tax Act 2007 s426.
Before deciding on the exact amount of the donation he had put a provisional figure for gift aid of £400,000 into his tax return software, but when he came to submit the return he omitted to check and update that amount.
Precision is essential
Therefore, his claim stated he had made a gift of £400,000 when his gift was actually £800,000. In providing for carry-back s426 refers throughout to “a gift” and HMRC’s interpretation is strict: only the entire gift can be carried back, not part of it.
This inaccuracy rendered the entire claim invalid: it could not be treated as divisible into two parts, one of which could obtain gift aid. Also, because the claim was defective it could not be amended or rectified, even within the one-year window within which other entries on a return may be corrected or amended. This is because the TMA 1970 section that provides for amendment does not apply retrospectively.
As a result Webster lost the all the gift aid benefit for 2016/17. This was a crucial factor for him because it was in that year that he had paid enough income tax to cover the amount that the charity might reclaim.
While the carry-back election was invalid, the gift aid declaration to the charity was unimpaired but required comparison of the tax to be reclaimed with Webster’s income tax liability for 2017/18.
In that year he did not have the same large liability as he had had in the preceding year and so was obliged to make good to HMRC the tax credit reclaimable by the charity.
The failure of the carry-back claim also denied Webster any higher rate income tax relief for 2016/17, so he had significantly underpaid income tax for that year, incurring interest on that underpayment.
HMRC enquired into his returns and the department’s closure notice for 2016/17 included a 15% penalty for careless inaccuracy. The total additional amount due from Webster was approximately £215,000.
High Court challenge
Complication, and no doubt additional expense, were added into the mix through the method of challenge Webster adopted. As well as pursuing matters through the conventional channel of the tax tribunals, he took the highly unusual step of applying to the High Court for the equitable remedy of rectification to correct an error in his claim.
In short, this route didn’t get him anywhere. Rectification as an equitable remedy is only available if:
- it corrects an error in a document
- no other remedy is available
- it is fair and just to allow the document in question to be rectified; and
- the court is an appropriate forum for resolving the problem.
The judge made it clear that he did not regard a careless mistake as suitable for rectification by the court and observed that since a tax return includes a declaration that it is to the best of the taxpayer’s knowledge correct and complete, he has a responsibility to take reasonable care.
The judge noted that the taxpayer had other routes to correct a return which were not yet exhausted and the appeal to the first tier tribunal (FTT) was yet to be heard. The judge also observed, as an aside, that if there was any document that might be rectifiable that would be the gift aid declaration given to the charity.
Ultimately the judge suggested that attempting to use the High Court to obtain a remedy on a case that was fundamentally flawed would be susceptible to being struck out as an abuse of process.
The High Court judge was completely unsympathetic to the contention that Webster had not been careless. The taxpayer’s argument was that this had been a single slip, and an easy one to overlook because it did not affect the ultimate tax liability as shown on the tax return and so there was nothing to alert Webster to the mistake.
Taking into account the amount at stake it was not reasonable to accept that Webster was not careless when he did not take the trouble to check that all the figures in the return and claim were correct.
The FTT will decide the appeal against the penalty, but it is difficult to see how the judges there will be likely to take a different view from the High Court.