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Mark McLaughlin comments on a recent tax case where the early filing of a tax return caused problems for the taxpayer, when carrying back charitable payments under Gift Aid.

Introduction

The reduction in personal allowances for those with income exceeding £100,000 was introduced from 6 April 2010 for 2010-11 and later years. The effect of legislation introduced in Finance Act 2009 is that personal allowances above that level are tapered away, and at current levels are reduced to nil if adjusted net income exceeds £112,950, with an effective tax rate of 60% for income within the lower and upper income bands.   

Tax planning in this area therefore revolves around ensuring that adjusted net income remains outside the reduction thresholds. 'Adjusted net income' is defined (in ITA 2007 s 58) in terms which allow relief for pension contributions, and for Gift Aid contributions carried back. The facility to carry back Gift Aid contributions (by election under ITA 2007 s 426) is a potentially useful form of tax planning because it involves a degree of hindsight.

Carrying Back Charitable Donations to Save Tax

However, care is needed if such planning is to succeed. The Gift Aid legislation requires that an election to carry back a qualifying donation must be made on or before the date on which a tax return is delivered for the previous tax year, (i.e., the tax year for which relief is to be given), and not later than the normal self-assessment filing date for that previous tax year.

In John Cameron v CRC [2010] UKFTT 104 (TC) TC00415, Mr Cameron was a farmer who realised a substantial sum on selling a large part of his farming assets in 2005/06. He wished to use part of the sum to establish charitable trusts to enable young people to see the World. His advisers told him that a donation to charity in 2006/07 could be carried back to the 2005/06 under Gift Aid. Mr Cameron’s 2005/06 tax return had been submitted to HMRC in August 2006. The charitable trust was created in November 2006, and Mr Cameron donated £936,000 to the trustees in that month.    

When was the Tax Return ‘Delivered’?

Mr Cameron’s advisers submitted an amended 2005/06 tax return on 29 January 2007, claiming Gift Aid by election against his income and gains of 2005/06. HMRC enquired into the return and refused the claim, contending that the claim could only be made in the original return. Mr Cameron’s appeal was broadly on the basis that his 2005/06 return was ‘delivered’ when it was amended, and therefore the carry back election was made when the return was delivered, and was therefore on time.

Unfortunately, the tribunal held that a natural and literal reading of the relevant legislation meant that the time limit for the Gift Aid carry back claim was by reference to the date when the original return was delivered to HMRC. The taxpayer’s appeal was dismissed, although the tribunal Judge added: “I would like to have held in Mr Cameron’s favour but on the words of the statute, I am unable to do so.”

Don't File Your Tax Return Too Soon!

Interestingly, the tribunal Judge summed up HMRC’s position (and the shortcomings of the legislation) in this way:

“…in effect [HMRC] said: “if only Mr Cameron had not been so prompt and diligent in submitting his return, if only he had waited until 29 January 2007 before submitting his complete return, then all would have been well and he would have got his relief, but as it was, his prompt compliance was his undoing.””   

In effect, the taxpayer was penalised for being efficient. The moral in this case seems to be that if a gift aid carry back claim is in prospect, it would be prudent to delay filing the earlier year's return until just before the normal filing date, if possible.