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Tax Relief

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The Forget-Me-Nots Organisation became a registered charity (no. 20144661) in May 2017.  Learn more about Irish registered charities at Charities Regulatory Authority.  If you would like to donate and avail of tax relief learn more at www.revenue.ie.  Thank you in advance for considering us for a corporate or invidivual donation.



Blog Transcript:

Budget 2013 introduced some significant changes to the tax relief on charitable donations. There has been very little in the way of discussion on this topic and it would appear that many people are unaware of the changes or of the details of the relief as it existed before. Below we have outlined some interesting background to it.

Why do people make charitable donations?
The single most common reason cited for making donations to charity is to avail of tax deductions. This does not actually mean that you gain from giving the donation but rather that you don’t pay tax on the money you gave away or that the tax you paid on such money is somewhat reduced i.e. the actual cost to you of the donation received by the charity is reduced by your tax savings (more details below). The general driver behind such reasoning is that someone is going to take a portion of your money and that someone can either be the government or a charity of your choice (we all like to feel that we have some control).

While tax savings are a factor in the decision to donate or not this is certainly not the sole consideration. People will often contribute to charity for reasons of religious/spiritual obligation i.e. they wish to support the work of their church or they feel obliged to make donations by reason of their faith.

However, even people who would not consider themselves religious will choose to make donations because, lets face it, human beings generally feel good when they do something good. Surveys have proven that givers are happier than non givers and in general we all like to feel that we are making a contribution whenever we can. In a time when we have so little control over many of our outgoings (taxes, mortgage payments, utility bills etc) charitable contributions are still something that we can control i.e. we decide when to give, how much to give and who to give to.

Tax position – Ireland – pre 1 Jan 2013

For donations made by individuals the relief available differed between PAYE taxpayers (employees) and those required to submit annual tax returns (i.e. self- employed people, those with rental properties, investment income, company directors etc).

PAYE Taxpayers
For PAYE taxpayers the relief was allowed on a “grossed up” basis and was granted to the charity rather than to the individual making the donation. For example, if an individual who paid tax at the higher rate (41%) gave a donation of €250 to an approved charity the charity was entitled to essentially claim back from Revenue the tax which had been applied to this income before it was received by the individual i.e. the individual needed to earn €424 gross in order to have net income of €250 (ignoring PRSI and USC) to make such a contribution. Tax at 41% was applied to the €424 (€174) via the payroll and the charity was therefore entitled to claim this amount back from Revenue.

The net amount received by the charity differed depending on whether the individual was taxable at the standard (20%) or the higher (41%) rate. The table below illustrates the net difference to the charity for an individual making a contribution of €250:

Higher Rate Taxpayer

Standard Rate Taxpayer

Individual donates €250 take-home pay
Charity applies to Revenue
Charity receives additional €174 from Revenue
Total amount received by Charity €424

Individual donates €250 take-home pay
Charity applies to Revenue
Charity receives additional €62.50 from Revenue
Total amount received by Charity €312.50

The individual giving the donation in each of the above scenarios does not receive any personal benefit from the donation but knows that when they make a contribution the charity will receive a higher amount. In some cases people may factor this into their decision in relation to the amount they contribute.

Self-Assessed Taxpayers
For these individuals, the relief was very different. There was no grossing up arrangement and instead the individual was entitled to claim relief on their annual tax return. The amount donated was deducted from the individual’s taxable income on their tax return thus reducing their tax bill i.e. they were essentially not taxed on the income they no longer had. In these circumstances, the amount received by the charity was not affected by the taxpayer’s tax rate. The table below illustrates how the relief worked for such individual:

Higher Rate Taxpayer

Standard Rate Taxpayer

Individual donates €250 gross earnings
Individual claims relief on tax return
Individual’s liability is reduced by €102.50
Total amount received by Charity €250

Individual donates €250 gross earnings
Individual claims relief on tax return
Individual’s liability is reduced by €50
Total amount received by Charity €250

Tax position –Ireland- from 1 Jan 2013
With effect from 1 January 2013, the above has changed and in fact the scheme for relief for charitable donations has been simplified considerably. There will no longer be any distinction between PAYE taxpayers and Self Assessed taxpayers and the relief in respect of charitable donations will in all cases be refunded to the charity.

Relief will now be granted at the new blended rate of 31% rather than 20% or 41% as above. An annual limit of €1 million per individual that can be donated under the scheme is also being introduced.

Charities will be required to obtain certificates from their donors confirming their PPS numbers, the eligibility of the donation and the fact that the tax they will pay for the year will be at least equal to the relief due to the charity. As part of the simplification process, provision is being made for an enduring certificate which will last for up to five years and can be completed by a donor in lieu of an annual certificate.

Effect of changes for individuals
For PAYE taxpayers there will be little impact – such individuals never obtained any personal benefit (perceived or otherwise) from the making of a charitable donation.

For Self-Assessed taxpayers there is a difference. The tax relief is not lost but rather it is being granted in a different manner. As the relief for such taxpayers is now being granted on a grossed-up basis, some calculations may need to be done in order for taxpayers to be clear in advance of the making of a donation. There is still a benefit for such people in making donations. Remember, no one ever really made a financial gain from a donation. The perceived gain arose via the fact that an individual did not pay the tax on the income that they donated i.e. the income they no longer had. Once again, it is probably best to illustrate the point via some examples:

Old Regime

New Regime

Higher Rate Taxpayer
Donates €500
Tax Liability reduced by €205
Net cost to taxpayer €295
Net donation received by Charity €500

Higher Rate Taxpayer
Donates €295
Tax Liability reduced by 0
Net cost to taxpayer €295
Net donation received by Charity €427

Taking the above example, we have worked through the old and new regimes in order to illustrate how a taxpayer may calculate in advance of making their donation how much they should contribute under the new regime in order to be no further out of pocket than they would have been under the old regime. Clearly in the above example while the taxpayer’s net cost remains unchanged at €295, the charity has lost from old to new regime.

The following example illustrates the position for a standard rate taxpayer:

Old Regime

New Regime

Standard Rate Taxpayer
Donates €500
Tax Liability reduced by €100
Net cost to taxpayer €400
Net donation received by Charity €500

Standard Rate Taxpayer
Donates €400
Tax Liability reduced by 0
Net cost to taxpayer €400
Net donation received by Charity €580

Taking the above example, it is clear that if the taxpayer is a standard rate taxpayer the charity will gain under the new regime. If one were to assume that those making charitable donations were in equal measures standard rate and higher rate taxpayers one would conclude that the net effect for charities will be neutral.

The following illustration may be helpful if the donor wishes to protect the net income of the charity:

Old Regime

New Regime

Higher Rate Taxpayer
Donates €500
Tax Liability reduced by €205
Net cost to taxpayer €295
Net donation received by Charity €500

Higher Rate Taxpayer
Donates €345
Tax Liability reduced by 0
Net cost to taxpayer €345
Net donation received by Charity €500

Effect of changes for charities
The government has indicated that this change will be neutral i.e. that it will essentially balance itself out. However, only time will tell. The good news for charities is that the system is set to be simplified with the introduction of the enduring certificates and the facility to process claims online.

Will people be less inclined to make charitable donations further to the above changes? Most likely not, as outlined above, tax is not the only driver for people in the making of such decisions. Also, while it may appear to Self Assessed taxpayers that there is no longer any benefit from making a donation it is clear from the above that there is still tax relief to be claimed. It just looks a little different. It is still possible to direct some of your hard earned cash to a charity rather than to the government!

 
 
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