How to persuade the taxman to make a donation to your favourite charity
Deeds of Covenant Including Fiscal Year Covenants Explained
by Alastair McIntosh
Published
in The
Guardian, Manchester, 25 June 1983, p. 20.
It is now two years since the Government introduced Important changes to encourage covenanting to charity. The minimum duration of a covenant was reduced from seven years to four, and special incentives were introduced for those paying ‘income tax at a rate higher than the basic 30 per cent.
The
covenant Income of some charities has blossomed as a result. Dr Barnados have
reported a rapid rate of growth in funds from this source, while Christian Aid
have spoken of a covenant “explosion.”
Others
have reported little change, but one point on which all would agree is that they
could do much better if some of the myths and fears surrounding the deed of
covenant were dispelled. Further benefits would arise. For instance, if more
donors knew of the advantages of ,discretionary and deposit covenants,
A
covenant to charity is essentially a written agreement to donate a fixed sum
of money over a period of at least four years. Provided that throughout this
time either you, or your spouse, pays income tax, the Inland Revenue will add to
your gift. They will refund, to the charity, all the basic rate tax you paid on
the money being donated.
This
increases the value of the donation by approximately 43 per cent. “But why
43 per cent when I only pay tax at 30 per cent?” asks many a bewildered donor.
The
reason becomes clear if one considers the following example. Out of £100 earned
by a basic rate taxpayer, the Inland Revenue will take £30, leaving £70 net
income. If this £70 is covenanted to charity, the Revenue will also
“donate” the £30 it took, and whereas this represented Just 30 per cent of
£100, it is, of course, 43 per cent of £70. The apparent paradox is simply the
result of working out the percentage from a smaller base figure.
The
tax-man is even more magnanimous if you happen to pay tax, inclusive of any
investment income surcharge, in a bracket higher than the 30 per cent basic
rate. Provided you declare covenanted giving when filling in your annual tax
return form, the difference between basic rate taxation and your
higher
rate will be refunded to you personally. This measure was introduced in the
hope that it would encourage increased giving.
A
nunber of brooding fears can make people apprehensive about covenanting. For
example, are covenant forms couched in legal jargon so obscure that you need
professional help to fill them in?
A
few charities have somewhat antiquated forms, but most now realise that it is
perfectly acceptable to work their deeds of covenant in plain English.
A
recent Oxfam covenant form, for instance, bears little more than the simple
words, “I ... undertake to pay Oxfam each year for four years (or during my
lifetime if shorter) from today the sum that will, after deduction of income tax
at the basic rate £...”
Most
charities attach banker’s orders to their covenant forms. It cuts down on
administrative work if donors make use of them. Payment may be made annually, or
in quarterly or monthly installments if preferred.
Another
reason why people are sometimes apprehensive about covenanting is the fear that
their income might drop. What happens if, as a result of unemployment or illness
some other calamity you just cannot fulfill your agreement to pay up over the
necessary number of years?
Some
charities make provision for let-out clauses to be written into the deed to
allow for such contingencies, but most of them consider this precaution to be
unnecessary. They will usually agree to a covenant being terminated if a donor
has fallen on hard times.
Conversely,
if one’s financial fortunes happen to swing the other way, it is simple to
covenant more to the same charity. To alter an existing deed of covenant is
complicated since it has to be extended for a further four years minimum.
The easiest way is therefore to substitute the old covenant with a new,
higher one.
If
you have any queries about this, the charity you intend to favour will no doubt
bend over backwards to advise.
Taxpayers
inhibited by the necessity to commit themselves to the same charity for a
minimum of four years need not be deterred. They can give by means of a
so-called discretionary covenant. A number of charities which specialise in
helping other charities run these discretionary covenant services:
the
Liverpool Council of Social Service was a pioneer in this respect. It is very
much
a growth area, as evidenced by the recent setting up of Charitable Giving
Scotland. But perhaps the best-known scheme is that run by the Charities Aid
Foundation (CAF). There are slight differences between one scheme and another,
so it can pay to shop around.
Another
underemployed way of giving is through a deposit or loan covenant. This is a
method of covenanting a one-off lump sum. Some extra administrative work is
entailed for the charity, but deposit covenants are worth the effort for gifts
of £50 or more. The procedure is that you deposit, say, £100 with the charity
as a “loan.” You also sign a letter authorising the treasurer to draw on
this loan for the four annual payments under the covenant which is signed at the
same time for, in this case, £25. The outcome is that the charity has immediate
use of the total value of the gift. In addition, it can make four annual tax
claims which increase the value of the original gift by 43 per cent and at no
extra cost to the donor.
A
further point has just recently been clarified with the Inland Revenue. It can
reduce, to less than three years, the time taken to recover tax. If the deed is
worded, for example, “I undertake to pay to ... in each of the years ended
April
5,
1984 to 1987 inclusive the sum that …” the charity can make the first
transfer from the loan account on receipt of the deposit and the remaining three
at the beginning of each tax year.
Precisely
how long full tax recovery takes with a covenant expressed in this way depends
on how close to the end of the tax year the deed is dated. For example, if the
date is April 5, the charity can immediately claim on income tax paid during the
one financial year, and the following day, put in a claim for the second year.
The third claim goes in a year later, and the fourth, just two years and a day
after the covenant was signed.
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