Audits by HMRC Charities - during the audit
4 What will the audit review involve?
4.1 Our auditors will check records supporting a tax repayment claim including donation records, Gift Aid declarations and banking/cash records.
4.2 This will usually involve reviewing the charity’s accounting records, systems and procedures.
4.3 During the course of this work we may also identify other potential tax risks - such as non-charitable expenditure, employer compliance and VAT issues.
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 we consider to have been incorrectly repaid;
- arrange a further payment where the charity has claimed less than was due;
- refuse to authorise payment of a claim that we consider to be incorrect and
- refer matters for further consideration within HMRC.
5 What will the auditor be looking for?
5.1 Essentially, the auditor will need to be satisfied that the charity’s records properly support the tax repayment claims.
5.2 The auditor will make checks such as ensuring that tax repayment forms (R68) have been properly completed from the charity’s records.
5.3 The auditor will seek to confirm the validity of Gift Aid claims by ensuring that:
- valid 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.
5.4 The auditor will need to see that an acceptable audit trails exists to link tax repayment claims to individual donations and to Gift Aid declarations.
5.5 The auditor will also need to see that an acceptable audit trail exists to show that the repayment under review has been correctly received by the charity.
5.6 For detailed guidance on the records you should keep and how long you need to keep them,
6 What constitutes an acceptable audit trail?
6.1 Usually an acceptable audit trail is easily established for donations received by cheque, debit card or credit card. However, there can be difficulties in:
- linking a particular cash donation to an individual who has given a valid Gift Aid declaration and
- tracking that donation from the time it is made to the time it is banked (or spent without first banking) by the charity.
6.2 A charity must ensure it maintains suitable records when claiming Gift Aid on cash donations.
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.
6.4 As an example, a tried and tested record system that meets our 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 a charity official 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 6 years from the date that the donation is included in a charity repayment claim and;
- a record being kept of the total cash collected and how it is banked (or spent without first banking).
6.5 This is not the only system that will meet our requirements but it illustrates what we are looking for.
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 but is not required to keep every envelope given.
6.7 We are happy to review and comment on any system you have in place or are thinking of introducing in your charity.
6.8 Detailed guidance on the records you should keep and how long you need to keep them is available at chapter 3 of the Detailed Guidance Notes for Charities.
7 What Other ‘risks’ will the auditor be looking for?
7.1 Primarily, the auditor will be checking that the charity’s records are sufficient to support the tax repayment claims under review
7.2 The auditor will also 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.
7.3 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.
7.4 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.
7.5 If we find an unacceptable proportion of individuals are untraceable this may suggest poor record keeping, inadequate communication with donors or, exceptionally, fraud – all issues we would need to discuss further with the trustees.
7.6 In the course of their work, the auditor may sometimes come across evidence that a charity is failing to fulfil responsibilities with regard to other tax obligations (e.g. 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.
