Interaction between VCT relief and Gift Aid

jf20938

I'm investing heavily in Venture Capital Trusts this year and am conscious that the 30% relief will be eroded if I bring my net Income Tax down to "beyond nil".  In addition, I've made some donations under Gift Aid (and may make more). As a Higher Rate taxpayer, I expect some relief from them too. 

So how do the two reliefs interact?  I know that I cannot reclaim more tax than I've paid so there must be an order that HMRC uses to award one relief at the "expense" of the other. 

The website https://www.gov.uk/hmrc-internal-manuals/venture-capital-schemes-manual/vcm51030 seems to acknowledge the issue: "For the interaction with Gift Aid relief, see Charities and Tax".  But there is no link and a search of the HMRC website for "Charities and Tax" yields nothing very useful. 

Perhaps this is just academic: if I've been refunded all my Income Tax, then it matters not how each relief is calculated.  But I can't help suspecting that there is more to it and HMRC's mechanism is worth understanding. 

Jeremy535897

"VCT income tax relief is limited to an amount that reduces an investor’s income tax liability to NIL. Advisers and clients should be aware that the amount of VCT income tax relief that the investor can claim could be reduced by any other transaction that effectively benefits from income tax relief, such as a Gift Aid payment. This is because, certain transactions, including Gift Aid payments to charities, for example, are treated as having been made after deduction of income tax. As a result, HMRC requires the donor to have paid enough income tax or CGT in that year to cover the tax the charity can claim from HMRC. In this scenario, if VCT income tax relief is used to reduce a client’s income tax bill to NIL for a year in which that investor has no CGT liability but has made Gift Aid donations, the client may have to pay an additional amount of income tax to cover the amount of tax reclaimed for the year by all the charities to which the client has made Gift Aid donations."

From https://growthinvest.com/wp-content/uploads/2020/10/Intelligent-Partnership-An-Advisers-Guide-to-VCTs-1.pdf page 17.

[Deleted User]

Yes - many years ago when in HMRC I used to look after the tax affairs of the clergy. Many were caught by this, having given to charity (the church) and not paid sufficient tax to ‘cover’ the tax reclaimed by the recipient. From memory a charge under S.350 - but a long time ago!

Edit: 

https://library.croneri.co.uk/cch_uk/btl/taxbull-it-taxbull-tb02-01-3?highlight=1

Jeremy535897

Section 424 ITA 2007, replacing section 350 ICTA 1988. Not that it matters!

jf20938

Jeremy535897 said:

"... As a result, HMRC requires the donor to have paid enough income tax or CGT in that year to cover the tax the charity can claim from HMRC. In this scenario, if VCT income tax relief is used to reduce a client’s income tax bill to NIL for a year in which that investor has no CGT liability but has made Gift Aid donations, the client may have to pay an additional amount of income tax to cover the amount of tax reclaimed for the year by all the charities to which the client has made Gift Aid donations."

Thank you for this, and for the very useful reference which I'll read carefully.

You have drawn my attention to something I hadn't thought of: that the tax relief claimed by the charity is relevant, not just the additional relief to me as a Higher Rate taxpayer.  I'll work through the calculation and, possibly, adjust the income from my SIPP to ensure I've paid enough Income Tax to support my Gift Aid donations in full. 

To be realistic, the amounts involved in this fine-tuning are relatively small but I was curious and am glad I asked. Ta. 

jf20938

[Deleted User] said:

Yes - many years ago when in HMRC I used to look after the tax affairs of the clergy. Many were caught by this, having given to charity (the church) and not paid sufficient tax to ‘cover’ the tax reclaimed by the recipient. From memory a charge under S.350 - but a long time ago!

Edit: 

https://library.croneri.co.uk/cch_uk/btl/taxbull-it-taxbull-tb02-01-3?highlight=1

Thank you too.  I feel their shock when told to pay more.  The link looks very useful but do I need a subscription or pay a client charge to access it?