Audits by HMRC Charities - during the audit

7.4 What will the audit review involve?

7.4.1 HMRC auditors will check records supporting a tax repayment claim including donation records, Gift Aid declarations and banking/cash records.

The auditors will generally base every review as follows:

If the charity is a trust for tax purposes, the auditors will review claims submitted that cover the last full tax year, that is, claims submitted in respect of donations received between 6 April and 5 April.

If the charity is a company for tax purposes, the auditors will review claims submitted that cover the year up to the last Accounts Period Ended (APE), for example, a charity has an APE of 30 September - claims will therefore be reviewed in respect of donations received between 1 October and 30 September.

Where there is a specific reason for reviewing earlier claims the review may extend beyond the periods referred to above

7.4.2 The audit will involve reviewing the charity's accounting records, systems and procedures.

7.4.3 During the course of this work HMRC may also identify other potential tax risks ,such as non-charitable expenditure, employer compliance and VAT issues.

7.4.4 Where potential problems are identified, the auditor may:

• advise the charity on accounting improvements that should be made
• take action to recover tax that HMRC consider to have been incorrectly repaid
• arrange a further payment by way of a further claim where the charity has claimed less than was due
• refuse to authorise payment of a proposed claim that HMRC consider to be incorrect
• refer matters for further consideration to other HMRC departments
• provide any advice necessary to help reduce the burden of record keeping for the charity

7.5 What will the auditor be looking for?

7.5.1 Essentially, the auditor will need to be satisfied that the charity's records properly support the tax repayment claims.

7.5.2 The auditor will make checks such as ensuring that tax repayment forms (R68i) have been properly completed from the charity's records.

7.5.3 The auditor will seek to confirm the validity of Gift Aid claims by ensuring that:

• appropriate Gift Aid declarations are held for all donations on which a Gift Aid tax repayment is claimed
• donations meet the requirements of the relevant legislation - for example that gifts are not subject to a condition as to repayment
• any benefits provided for Gift Aid donors do not exceed statutory limits

7.5.4 The auditor will need to see that an acceptable audit trail exists to link tax repayment claims to individuals, their donations and to their Gift Aid declarations.

7.5.5 The auditor will also need to see that an acceptable audit trail exists to show that the repayment under review has been received by the charity and been correctly banked into the appropriate account.

7.6 What constitutes an acceptable audit trail?

7.6.1 Usually an acceptable audit trail is easily established for donations received by cheque, standing orders, direct debits, debit card or credit card.

Cheque payments should be detailed on the paying in slips when banked by the Charity, or can be included on a banking breakdown sheet if there are numerous cheques.

Standing Orders and Direct Debit payments can be fully reviewed directly from the Charity's bank statements.

Card payments can be traced through the verification and confirmation provided to the Charity by the card issuer.

However, there can be difficulties in:

• linking a particular cash donation to an individual who has given a valid Gift Aid declaration
• tracking that donation from the time it is made to the time it is banked by the charity

7.6.2 A charity must therefore ensure it maintains suitable records when claiming Gift Aid on cash donations. This may include an envelope giving scheme (see 6.4), or the issuing of receipts for every cash donation received.

7.6.3 It is not acceptable for a pool of cash collected on an unattributable basis to be arbitrarily allocated to individuals for whom a Gift Aid declaration is held and claims made on that basis.

7.6.4 As an example, a tried and tested record system that meets HMRC requirements involves:

• an individual sealing a cash donation in an envelope with a pre-printed Gift Aid declaration on it and putting his/her name and the amount given on the outside
• the envelopes being opened in the presence of at least two charity officials with the amount contained in each being checked against the statement on the outside and attributed to the named individual
• a record being kept of the name and amount given by each donor for whom a valid Gift Aid declaration has been received
• the envelopes that incorporate the Gift Aid declarations for one off donations being retained for four years from the date that the donation is included in a charity repayment claim
• a record being kept of the total cash collected and how it is banked

7.6.5 This is not the only system that will meet HMRC requirements but it illustrates what they are looking for.

7.6.6 An envelope might, instead of a declaration, incorporate a reference that links the named donor to a declaration given earlier, covering all donations to the charity. In such circumstances, the charity is advised to keep a minimum of one month's envelopes per tax year, covering a period of four years. For example, a church may decide to keep every general giving envelope received throughout the month of August. After a period of four years the church will have in place a total four months envelopes, all received during August for the preceding four years.

7.6.7 HMRC are happy to review and comment on any system you have in place or are thinking of introducing in your charity.

7.7 What other 'risks' will the auditor be looking for?

7.7.1 The auditor will consider whether there is anything that would bring into question entitlement to exemptions from tax available to charities - such as pursuit of non-charitable activities or applying funds for non-charitable purposes.

7.7.2 The auditor may also check that donors, who have provided Gift Aid declarations, have in fact paid the relevant amount of tax to cover the Gift Aid claimed on their donations. This will involve taking the names and addresses of some of the donors included in claims so that their tax records can be checked.

7.7.3 Any problems identified by such a review will be a matter between the individual donor and HMRC. A charity may offer to make good any shortfall due to donors having paid insufficient tax. In such circumstances, HMRC will be happy to advise the donors concerned of that offer. For reasons of taxpayer confidentiality, HMRC will not be able to identify the particular donors concerned to the charity. It will be up to the donors whether or not they wish to discuss such matters with the charity.

7.7.4 If HMRC find an unacceptable proportion of individuals are untraceable this may suggest poor record keeping, inadequate communication with donors or, exceptionally, fraud - all issues they would need to discuss further with the trustees.

7.7.5 In the course of their work, the auditor may sometimes come across evidence that a charity is failing to fulfill responsibilities with regard to other tax obligations (for example, in the operation of PAYE or VAT). Any such issues will be brought to the attention of the trustees and may be followed up by other HMRC offices.