From: Ronald Raygun 
Subject: Re: Donations from UK to a US charity -- best way?
Newsgroups: uk.finance
Date: Wed, 27 Oct 2004 12:10:06 GMT

Allan Gould wrote:

> "Anthony R. Gold" wrote:
>> On Tue, 26 Oct 2004 10:15:47 +0100, Allan Gould
>>  wrote:
>> 
>> > For the last two years, I've made a donation to a US charity (what the
>> > US might call a "not-for-profit" organisation which benefits from an
>> > analagous tax deductible donation for the donor like in the UK) from
>> > the UK and I've been able to do it under GiftAid (so you get the tax
>> > benefits in the UK).
>> 
>> In the UK the income tax benefits go to the charity while in the USA the
>> tax benefits go to the donor.  I don't see that as analogous.

I do see it as analogous because (though I don't know how the USA
system works in detail) the effect of both systems is that the tax
man loses out on tax deducted from earnings used to fund the donation.

Whether the donor makes a gross donation from net earnings, and gets
a refund of tax, or makes a net donation and the charity gets the
tax refund, the effect of both systems is that the charity gets more
money than the donor would have been able to spend had he not donated.

> 
> In my dictionary, analagous is defined as similar
> 

If you're going to be pedantic, get the spelling right!
The word has only two As, and also two Os.

> Firstly, the point I was trying to make was that donations can be made
> to organisations in both countries that can benefit from tax relief
> (which, IMHO, is 'a good thing' whether you are the donor or the
> recipient: the tax authorities are favouring the overall donation)

Yes, that's a good thing, and also permits an analogy to be drawn
between the two systems.

> Secondly, in the scenario discussed (CAF), the (basic rate relief)
> income tax benefits accrue to the CAF account holder (the donor).

If you think that, then you've misunderstood the system.

For each £78 you pay into the account, it gets topped up with
£22 to make £100 which you can then donate to charities.  That
benefits the charities, not the donor.  (Actually, with the
admin slice, it's only topped up to £96).

> Also
> any applicable UK higher-rate tax relief goes to the donor as well.

If you think that, then you've misunderstood the system.

The idea behind it all is that the effect of Gift Aid tax relief
is that the full gross earnings which fund any net donation should
accrue to the charity.

In the basic rate scenario, the donor earns £100, pays £22 tax
on it, and thus has £78 to give to the charity.  The charity then
claims those £22 back from the tax man.

If the donor is only a starting rate taxpayer, he earns £100,
pays £10 tax, and thus has £90.  If he gives £78 of that to charity,
having made a Gift Aid declaration (slightly ill-advisedly), the
charity will still claim £22 from the tax man, but the tax man
will be £12 out of pocket, and indeed these £12 are in the donor's
pocket, and the tax man will want them back.

If the donor is a higher rate taxpayer, he earns £100 and pays £40
tax, he gives the remaining £60 to charity *plus an extra £18 on
top*, which he is now out of pocket by.  The charity claims £22
from the taxman, who now has £18 left over, which the donor can
reclaim, to re-imburse himself the extra £18 which did not come
from the £100 he earned on behalf of the charity.

In all 3 examples the donor's £100 of gross earnings end up in
the hands of the charity.  No benefit accrues to the donor at all,
apart, of course, from the warm feeling of having donated £100.

The starting/basic/higher rate taxpayers have £78/£90/£60 less
spending money available as a result of having made the donation.
Only, that's not quite true because the nasty tax man doesn't
refund that part of income tax which hides on the name of National
Insurance.