'£170m tax lost in Gift Aid abuse'
The National Audit Office (NAO) said that while Gift Aid was an "important source" of funding, worth £1 billion or 2% of charities' income last year, there was not enough evidence to show that relief on donations provided as much value for the sector as it could.
The NAO also highlighted a "serious compliance challenge" faced by HM Revenue and Customs (HMRC) in respect of relief on donations.
In a report, it said that HMRC only had a "crude" working estimate of £170 million for the amount of tax lost through avoidance, fraud and error for 2012/13, a total which may underestimate the scale of the problem.
The NAO said that while donors needed to have paid tax in order for charities to claim of Gift Aid, its analysis suggested the tax man may be paying a further £55 million in error where the donor has paid insufficient tax to allow the charity make a claim.
The report said the system was at risk from c riminals who may falsify donations to generate a repayment of Gift Aid relief and set up a bogus charity as a front to commit fraud.
It said that while the proportion of bodies set up for the purpose of abusing their charitable status was "very small", when taken together their impact was significant, accounting for around £110 million of lost tax in 2012/13.
HMRC has been putting more focus on weeding out fraudulent claims since 2009, the report said.
Before then, a greater emphasis was put on quickly processing Gift Aid claims so that charities got their money swiftly.
The revenue body estimated that compliance work by its charities team prevented the loss of £63 million of tax at risk from the abuse of reliefs on donations in 2012/13, representing a four-fold increase since 2009/10.
The Gift Aid and Reliefs on Donations report said it was vital the system was well-administered to protect the reputation of charities and give donors confidence.
It said the revenue service and the Treasury should work with charities and academics to collect better evidence to evaluate Gift Aid.
It said there was insufficient evidence to show that the Government had actively encouraged take-up of Gift Aid so that the charities who were entitled to the relief got the benefits and HMRC has not collected figures which would throw light on how the scheme has changed how donors behave or the size of their donations.
The relief allows charities to reclaim the equivalent of basic rate tax on donations made by UK taxpayers, subject to the donor filling out a simple form .
A donation is considered to be money which the donor has already paid tax on and Gift Aid allows charities to reclaim the basic rate tax from HMRC on its "gross equivalent" - the amount before basic rate tax was deducted.
As basic rate tax is 20%, this means for example that a £100 Gift Aid donation is worth £125 to the charity.
If the donor is a higher or additional rate taxpayer, the donor can also claim a reduction on their tax liability on the difference between their highest rate of tax and the basic rate.
The first Gift Aid scheme was introduced in 1990, initially to support only large, one-off donations.
Changes in 2000 broadened access to tax relief on donations, with the aim of encouraging more charitable giving.
The report said that while there had been a significant increase in the costs of reliefs claimed by donors since 2000, the revenue service did not know if the changes had prompted more donations.
Adjusted for inflation, charities received £1,060 million in tax relief on donations in 1999/2000, and donors received £130 million, while in 2012/13, charities received £1,040 million, and donors around £940 million.
Amyas Morse, head of the NAO, said: "Gift Aid is an important source of income for many charities, worth £1 billion to charities in 2012/13.
"The changes made in 2000 to increase charitable giving resulted in a further £940 million 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."
A Government spokesman said: "The Government is committed to encouraging charitable giving and since 2010 has made wide-ranging and generous reforms to the tax support available.
"Last year alone we paid over £1 billion to charities through Gift Aid, but this is a longstanding relief and we want to make sure it keeps pace with changes in the way people donate.
"We have recently consulted with the sector on modernising Gift Aid and we work closely with charities to make it as easy as possible for them to claim tax relief.
"However, it is important too that appropriate controls are in place.
"In the last four years HMRC has doubled the number of staff involved in Gift Aid compliance, coming down hard on any attempts to abuse Gift Aid for any purpose other than delivering vital support to charities."