In a recent article for Charity Finance, Partner and Deputy Head of Turcan Connell's Charities Legal Team Gavin McEwan discusses The Scotland Bill and changes to Gift Aid and the implications for Scottish Charities.

The full article by Gavin McEwan appears below courtsey of Charity Finance publisher Civil Society.

The Scotland Bill and Gift Aid

The Scotland Bill, which is presently making its way through Westminster, has implications for UK charities receiving gift aid donations from Scottish donors.

The Bill is the first major review of the devolution settlement for Scotland since 1998 and follows the report of the Calman Commission in June 2009. One of the policy objectives of the Bill is to provide the Scottish Parliament with greater control over the rate of income tax charged to Scottish taxpayers.

In order to establish a new Scottish rate of income tax, the Bill makes provision for the identification of Scottish taxpayers through a 'closest connection' test. The test will consider where a taxpayer's main residence is located as well as other relevant factors. Once a taxpayer is determined as having a closest connection with Scotland, the Scottish rate of income tax will apply to that taxpayer's income.

Where this has greatest potential impact on charities is in relation to gift aid reclaims. If Scottish income tax rates are used to calculate gift aid reclaims, then charities will be able to claim (potentially higher) relief at the Scottish rate where donations have been made by Scots. Other UK donors will still be governed by UK rates of income tax. Anomalies may arise, however, if the UK rates are applied in Scotland for gift aid purposes, even though the Scottish income tax rate might be higher. In that case, a Scottish donor's basic rate tax will not be fully recovered by the charity. It is unclear at the present time whether this would mean that part of a Scottish gift aid donation would effectively be retained by HM Revenue & Customs (HMRC), or whether the donor would be able to reclaim the balance personally (a task which many basic rate taxpayers will find daunting given that PAYE currently lifts this burden from them).

Other problems may arise if a higher rate of gift aid reclaim is allowed for Scottish donors, but the donor turns out, after the end of the tax year, not to have had a closest connection with Scotland at all. In that case, HMRC may seek to recover part of the gift aid reclaim from the charities themselves.

The final wording of the legislation will be keenly awaited north and south of the border and more detailed regulations are likely to be required before the new provisions are brought fully into effect - which in any event may not be until 2015.

Scottish Charity Accounts

Meanwhile, amendments to the Scottish charity accounting regulations come into effect on 1 April 2011. The gross income threshold for the preparation of fully accrued accounts will increase from £100,000 to £250,000 and the capital threshold for full audit will increase from £2.8m to £3.26m. The gross income threshold for audit will remain at £500,000. In addition, there are some amendments to the definition of 'gross income' for Scottish charity accounting purposes, along with other minor changes. The regulations apply to charity accounts for accounting years beginning nil or after 1 April 2011.