Abuse of Gift Aid and other tax reliefs on charitable donations has resulted in an estimated £170m tax loss in the past year, but HMRC does not have accurate data on fraud and error and faces a 'serious compliance challenge' over avoidance schemes, according to a report by the National Audit Office (NAO).
The £170m figure is described in the report as a 'working estimate' and NAO says HMRC recognises that its methodology for calculating how much tax is lost through avoidance, fraud and error is 'crude' and likely to understate the level of loss.
NAO says its own analysis suggests that HMRC may be paying out an additional £55m to charities in error where the donor has paid insufficient tax to allow the charity to claim Gift Aid. HMRC has said it plans to undertake a full analysis of the losses in respect of reliefs on donations in autumn 2013, according to the report.
HMRC also faces a serious compliance challenge in respect of reliefs on donations, in particular from avoidance. NAO says that while the proportion of charities set up specifically to abuse charitable status is very small, the cumulative costs of small-scale avoidance activity resulted in £110m of tax lost in 2012-13, partly through misuse of Higher Rate relief, compared to £45m lost through error and £15m as a result of fraud.
HMRC has identified eight marketed avoidance which it estimates put £240m of tax at risk, and which it is 'challenging robustly'. Following its investigations, 200 users have since withdrawn claims to the value of £23m. There remain 1,800 open cases, representing approximately 5% of all avoidance cases HMRC is investigating across the tax system and about 2% of the value.
HMRC estimates that compliance work by its charities team prevented the loss of £63m of tax at risk from the abuse of reliefs on donations in 2012 13, a four-fold increase since 2009-10, when the department introduced a new strategy to tackle fraud with stronger controls. However, the NAO says HMRC should do more to combine all the information it holds about the operation of reliefs on donations, which is currently held in different teams.
Overall, the NAO report says there is not enough evidence to conclude that reliefs on charitable donations in their current form, and the way they are implemented, provide value for money. The watchdog says this is partly because HMRC has not collected the data which would enable it to conclude how tax incentives since 2000 have affected donor behaviour, and calls on HMRC and the Treasury to work with the charitable sector and academics to obtain this.
Amyas Morse, NAO head, said: 'Gift Aid is an important source of income for many charities, worth £1bn in 2012-13. The changes made in 2000 to increase charitable giving resulted in a further £940m of reliefs going to individuals and companies as an incentive to give more money to charity. However, the exchequer departments cannot demonstrate that these incentives are working, or that the increased cost to the taxpayer has resulted in a rise in donations to charity.'
