And HMRC has no accurate estimate of how much tax is lost through avoidance, fraud and error, it warns.
In its latest report, the public spending watchdog says that GiftAid was worth £1bn to charities in 2012/13 (about 2% of all charity income) while individuals and businesses received £940m in tax relief on their donations to charity.
“However,” as NAO head Amyas Morse points outs, “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.
“There is insufficient evidence to conclude that reliefs on donations in their current form, and the way they are implemented, provide value for money.”
To start with, there is little information to indicate that the government has actively encouraged take-up of the reliefs so that those charities which are entitled to them get the intended benefits.
HMRC has not collected the data which would enable it to conclude how tax incentives, restructured and widened in 2000 to simplify the GiftAid system, have affected donor behavior since then or if they have increased the value of donations. “There is an absence of evidence that would demonstrate that the increased cost to the exchequer has resulted in an increase in the value of donations to charity,” the report says.
Reliefs on donations are susceptible to abuse and error but, despite having a dedicated charities team, HMRC can only give a “crude” estimate of how much is being lost. The overall figure of £170m for 2012/13 is, it admits, likely to understate the level of loss.
The largest losses – £110m – are from avoidance activities, such as misuse of the higher rate relief. “Significant sums are at risk from marketed avoidance schemes,” the report says, “though HMRC is confident it can counter this threat.”
The department has identified eight marketed avoidance schemes that have put around £240m of tax at risk. In the light of its investigations, 200 participants have withdrawn claims to the value of £23m. There are still 1,800 open avoidance cases relating to schemes that use the reliefs.
HMRC compliance work prevented the loss of £63m tax at risk from abuse of the reliefs over the year, a fourfold increase since 2009/10. However, it struggles to detect and counter avoidance activities of individuals or companies that don’t rely on marketed schemes.
None of this is helped by the fact that HMRC does not combine all the information it holds about the operation of reliefs on donations and so lacks a complete picture of the nature of risks and the cost and impact of its interventions to counter them. There are also too many gaps in its knowledge about its charity customers that prevent it from tailoring its interventions most effectively.
The NAO has come up with seven recommendations to improve the situation. They range from gathering better evidence about the impact of reliefs on donor behaviour and the amount of losses to working more closely with the Charity Commission and other regulators of charities to identify and resolve potential problems with the tax affairs and administration of charities.
Commenting on the report, Joanthan Russell a partner in UK200Group member firm ReesRussell, didn't think that donors, particularly in the case of smaller, one-off donations, were unlikely to be influenced by current tax relief provisions. "This is borne out by the failure of many taxpayers to record and claim all their gifts which they have given GiftAid declarations for,” he said.
However, Cormac Marum, a former inspector of tax and now head of tax at fellow UK200Group firm Harwood Hutton, thought that they didn't make use of the schemes because of "the fear that it is very complicated for the amount of money involved and that it will lead to complications with their tax affairs".
"Any move by HMRC and the Treasury to overcome these unwarranted concerns would be welcome. New tighter rules are not what is needed.
“The amount of charitable giving that does not make use of GiftAid is likely to be a much greater sum than the amount lost to bogus charities set up to abuse charitable status," he added.
“HMRC should tackle any cases where charitable status is being abused. Their crude figures on this are just as likely to overstate, as to understate, the level of loss in this area.”