Sajid Javid MP, Andrew Edwards and Sam Anderson gave evidence.

We will now hear evidence from the Economic Secretary to the Treasury, Sajid Javid, and his officials.

Q 85

Could you talk us through the motivation for clause 3(3)?

Sajid Javid: First, Mr Turner, may I start by saying that this has been a very informative session so far? I also want to put on record my thanks to everyone who has given up their time today to take part, give evidence and help the process of implementing and bringing to fruition this legislation.

With regard to Mr Thomas’s question, clause 3 is about the definition of “small donation”. Clause 3(3) refers to certain entities that are excluded from that definition. The reason for that goes back to the essence of the Bill and why the Government thought it appropriate to introduce it in the first place. I will start with that, because it may touch on some of the issues that have already been raised today.

The Government’s intention was to complement the current gift aid system, which has been very successful and has had cross-party support for many years. However, it was becoming increasingly apparent that when many charities received small donations, particularly in cash, the requirements for meeting the gift aid criteria—providing certain information and declaring that the donor was a UK taxpayer—was seen as either too burdensome or just impractical. The purpose of this Bill is to try to capture those smaller cash donations. The Government looked at this and defined a small donation; it is important that it is actually a donation given by individuals to support the charity in question, and is not seen in some way as a charge for a certain activity, such as entering a museum. In essence, that will help to explain clause 3(3).

Q 86

I asked the question because I was in conversation with the House of Commons Library, and it made it clear that its interpretation of the clause is that it brings the four named organisations into the remit of those that can take advantage of the Bill. I am surprised by that, in the context of what we have just heard from the National Trust. It said that up to 200 of its properties—presumably similar to the types that the Historic Buildings and Monuments Commission for England or the National Heritage Memorial Fund might support—will not be able to claim as a result of the new clause that the Government have tabled.

Sajid Javid: The definition of “small donation” is intended to capture and help small, community charities that raise funds for their activities through a donation process, and not from charging for any of those charitable activities. For example, charging for entrance to a museum is a charge and not a donation as far as this Bill is concerned.

Q 87

But the trustees of the British Museum could organise a bucket collection as a result of being included in this Bill and claim £1,250 back.

Sajid Javid: If they met the rest of the criteria in the Bill, they could.

Andrew Edwards: This rule replicates the gift aid rules, and brings the scheme into line with gift aid. The listed organisations are listed because technically, by law, they cannot spend money on non-charitable things. All that this provision does is bring them into line with gift aid, so they are treated the same way in this Bill as they are for gift aid purposes.

Q 88

You do not make the Bill fit with gift aid in terms of the types of small donations that can be registered. We heard from the previous panel of speakers that text giving is included in gift aid, but not in this Bill.

Andrew Edwards: Correct.

Q 89

I was wondering why it was felt to be perfectly adequate to allow quite large organisations to start claiming quite large amounts of gift aid immediately,  as soon as they register, but it was not in order for smaller organisations who have registered for gift aid to begin using this scheme.

Sajid Javid: Allow me to explain. That question came up a number of times during the evidence session and it is important. It is to do with preventing fraud. When a charity currently registers for gift aid, we set eligibility criteria for it. Clearly there are fit and proper person tests and others carried out, rightly, by HMRC, but the process of claiming through gift aid by definition involves the individual who makes a donation giving their name and address, declaring that they are a UK taxpayer, and sometimes providing other information. In itself, that provides an audit trail that helps HMRC, when it is looking at that process and looking to cut fraud, to monitor and better audit that process. Under this Bill, when the charities claim the top-up, which is not quite gift aid but is linked and designed to complement gift aid, the donations are cash, and the kind of audit trail available with gift aid simply does not exist. Imagine a bucket collection: once the money is taken, there is no way to know who threw money in or what their status is. To deal with that, the extra eligibility criteria have been introduced.

Q 90

But given that you have a cap on the amount, which is relatively low, the scope for fraud would appear to be equally limited, whereas with gift aid you are dealing in some circumstances with quite large amounts that people could claim are gift aid. It is not only the charities that could get money from the gift aid system; in some cases, the donors could, if they are higher-rate taxpayers. We have a system in which, potentially, a lot of money can be lost to the Treasury, but here you have got the requirement to be a charity—in most cases, though not all—the requirement to register, and then some further requirements, including a cap. Would the requirement to register gift aid and the cap be enough?

Sajid Javid: While I agree that £1,250 of top-up payment could be seen as a relatively small amount, one has to keep in mind that when you are dealing with a committed fraudster who can set up multiple claims through multiple false charities, those sums of £1,250 would add up to significant amounts. That is what HMRC has to deal with when it is combating fraud.

Q 91

A small independent charity that wants to start using the system has to meet all those criteria, including the matching criteria, the three-year track record and so on, before they start to claim. If I have understood this correctly, however, a single church that meets the community building test, and all the other tests that go with that, can start to claim right away—up to a £5,000 donation—and get the £1,250, because the parent already meets the other requirements. Again, the onus on the independent small charities is much greater than on an organisation with lots of limbs. Is that fair?

Sajid Javid: That might be an outcome. First, you are right to say that if you have a charitable structure—let us take the Roman Catholic Church as an example—of one single charity with multiple branches in the churches, then the requirements that you referred to, the three-year requirement and the matching requirement, need be met only once, by the parent charity. You are right to say, therefore, that—if you compare the situations—each  small, independent charity has to meet that requirement. While that might be an outcome of the legislation as framed, it is not the intention to make it more cumbersome and difficult for smaller charities. The intention is simply to come up with a fair and balanced way to give an incentive to charities to use this system to boost their income while dealing with fraud and protecting the taxpayer.

Q 92

Minister, you said earlier that the Bill is there, quite rightly, to help small charities to raise money from bucket collections—from donations. The looks, however, as though it works much better as a “small charitable donations” Bill—as it says on the tin—rather than as a “donations to small charities” Bill. Is that what is intended?

Sajid Javid: That is what is intended, yes. As you say, the Bill is to help small charities with their fundraising.

Q 93

But the Bill seems disproportionately to help larger charities with the existing processes and systems in place, while making it quite hard for those very small, local, community ones, which I think we would all like to help, because they do not have the gift aid history and that support behind them. That may be accidental, but is that a concern that you share with regard to how the Bill will apply?

Sajid Javid: No, I do not share the concern that it is a particularly hard process for small charities. Let us take a small, independent charity that is not associated with any parent organisation: the process is actually quite simple. Remember that there will be a lot of guidance on the process and how it is going to work from HMRC. HMRC will have a free helpline; charities that need extra help during the process can get it and the guidance can be updated if it turns out that it is not particularly clear. The process of making a claim, as long as the eligibility criteria are met—the three-year requirement and the matching requirement—is by a simple form that charities will fill in. They will put their bank account details on that form, send it to HMRC and get their top-up, if it was the maximum, of £1,250 per year.

May I give you the example of a local charity for a child in need of medical treatment abroad, or an implement that one cannot get on the NHS, for which a lot of money is raised quickly by the community? I am sure that you have seen such charities as often as I have. That will be completely outside the scope of the Bill, because that money will be raised and spent and the charity gone within the three-year period. That does not seem quite consistent with what we are all trying to achieve.

Sajid Javid: Sadly, those situations do occur and it is great when the local community comes together for them, but if the eligibility requirements were to be relaxed to deal with that type of situation, unfortunately, as well as helping people who are legitimately trying to help others, it would also open up an avenue for greater fraud. Again, as guardians of the public purse we have to find the right balance and take that into account.

Andrew Edwards: If an individual was unwell and the local community came together to raise money for them, that would not be a charitable purpose anyway—it  would not be within the gift aid scheme, for example. If an organisation is set up to benefit one individual, it would not be a charity. If an organisation already exists—set up to help sick children in the county of Berkshire, for example—it could help such a child. That would be an organisation that is already in existence, so would have been around for three years. We should bear in mind that such an example, although very deserving, probably would not qualify for gift aid, because the organisation is too narrowly focused on one beneficiary.

On Second Reading, the then Economic Secretary to the Treasury made it clear that she wanted the new scheme to be set up in such a way that it would not be exploited. She highlighted that,

“HMRC pays around £1 billion a year in gift aid to charities, and such large sums inevitably attract fraudsters.”

She said that,

“the generous nature of charitable tax reliefs means that they are vulnerable to exploitation”.—[Official Report, 4 September 2012; Vol. 549, c. 169.]

Can you say how many cases there have been and how much has been lost to fraud?

Sajid Javid: I will defer in a moment to Andrew from HMRC, but HMRC clearly has a lot of information on fraud that it has gathered over the years and also has its own ways of trying to detect fraud. I hope that you will agree that there is some information that HMRC cannot share, but Andrew will be able to give some information.

An estimate would be helpful. We are trying to get at the scale and to try to pin down whether the proposals in the Bill are proportionate, so an estimate of the amount that has been lost to fraud and the number of cases would be helpful. Thank you.

Andrew Edwards: Unfortunately, there is a limit on what we say publicly, but I can give you some facts and figures. For example, last year we stopped £10 million of fraudulent claims and we stopped another £30 million, roughly, of errors—those are not fraudulent, but they are still errors. You may have been aware that, as recently as 5 October an individual was convicted and locked up for five years in a joint investigation between us and the police for defrauding a charity of gift aid of £500,000. If you go to the Civil Society website, there is a report on the case. There are other cases where we are prosecuting people that are not in the public domain. We see cases of multiple applications, with organised criminals seeking to set up large numbers of what are, basically, fake charities. They flood us with applications, to get them into the system, and then start making claims. Recently, we had a case in which one organisation tried to set up 189 separate charities but, fortunately, our processors identified that and stopped the applications. If they had not, and the applications had got into the system, they could quite easily have started to make gift aid claims. Obviously, we cannot manually check every single gift aid claim we get, so there would have been a risk that some of them would have been paid. From the 189, we could have been talking tens of thousands or even millions of pounds being paid out.

I do not have an estimate of the total amount of fraud in the system, but I can tell you that last year we identified and stopped £10 million worth of fraudulent  claims and £30 million worth of incorrect claims. The amount in the system is obviously more than that, but that just gives you an idea of the scale.

Q 94

I have a question on a slightly different point, which was referred to in the summing-up speech by the Exchequer Secretary to the Treasury on Second Reading. He suggested that reducing the three-year limit, as had been proposed during the debate, would significantly increase the cost of the scheme. Can you say by how much it would increase the cost, if the limit was reduced to two years, and to one year?

Sajid Javid: It would most certainly increase the cost, but I do not have those numbers with me. I do not know if any of my officials have any information.

Q 95

Would you be able to have those numbers for us?

Sam Anderson: It would be tens of millions, I think.

Sajid Javid: If you are after specific numbers, I can look at trying to get them for you.

Q 96

I think that would be helpful because the Minister said during the debate that it would increase the cost and we are trying to get the scale of things. We have talked about £10 million in fraud, and I would like to know how many millions it would take to change the scheme.

Andrew Edwards: We can get the exact numbers, but from memory it is something like up to £30 million, potentially.

Q 97

May I raise one other point, for the moment? On Second Reading, it was also stated in the summing up that the basic scheme was very simple and that charities would not be required to keep records over and above what is “good practice.” Who will define that good practice?

Sajid Javid: Charities are already expected to have good practice, and there will be guidance once the Bill goes through. When we talked about fraud numbers earlier, my colleague used numbers under the gift aid system, which is, I think, the best example we have, but it is also a given that when you have a cash-based system without having a clear audit trail of people who are giving the cash, the potential for fraud will certainly increase, unless you have these kinds of eligibility criteria.

It would be unreasonable for us to ask charities for information about who made the donations—who gave what amount—but there are some good practice measures that we would expect them to have. For example, if there was a £50 note in a bucket collection, it would have probably come from just one person and would clearly not be eligible under the criteria, but if there were donations of £20 or less, it would be reasonable for charities to assume that it was not one person who had thrown in two £20 notes but that it was two separate donations.

Q 98

First, I congratulate you, because in the two and a half years that I have been involved with the Church of England, this is the first time that it appears to have agreed unanimously on anything. So well done for getting unequivocal support from the Church of England for the Bill, with no suggestion of any amendments.

Minister, you have estimated that the Bill will be worth £100 million a year for charities and sports clubs by 2015. On what basis have you calculated that? How has that calculation been arrived at, just out of interest?

Andrew Edwards: We have looked at the current population that claims gift aid; obviously, we have had to make assumptions about how many small donations charities get, how many are within gift aid and what they would therefore be able to claim under the Bill.

We have also looked at other organisations that do not currently claim gift aid but, as a result of the Bill, might decide that they will now do so because it gives them access to the small donations scheme. We have therefore factored in an estimate of how many extra organisations will register with us and start to claim. When we add those together, we eventually get the £100 million.

All those numbers have been past the Office for Budget Responsibility, which has agreed that our estimates are reasonable. If you are interested, we could let you have the exact estimates. I do not have them in front of me, but they are made up of a mixture of how much existing charities are getting that they cannot get gift aid on and how many new charities will be attracted into the scheme.

Sam Anderson: May I add some points to that? Obviously, we have costed the scheme and published those costings from Budget 2011. We will be revising those costings as we have made policy adjustments over the last few months in response to consultation processes such as this.

The Office for Budget Responsibility will want to test those assumptions with us. We have a process for doing revised costings around fiscal events. We would expect to explore those costings with the OBR in the run-up to the autumn statement and then release revised costings on the back of that. As my colleague was saying, we still expect the scheme to raise about £100 million extra for charities by the time it is up and running.

That is very good.

Presumably, there is going to be—Minister, you were saying this—some very straightforward advice for charities so that they can work their way through. For example, when I looked at clause 1(2), I froze because it took me back to O-level algebra. I had very little time to work this one out; it would be a challenge for any colleague. I can see quite a lot of treasurers of small charities freezing at this point:

“The amount of the top-up payment is—

…where”

R is defined as

“the percentage rate of the basic rate of income tax for the tax year in question.”

Hopefully, you will have a website, briefing and literature so that small charities in towns and villages can understand how they apply this.

Sajid Javid: Sir Tony, with your years of legislative experience you will know that in legislation one has to be as clear as possible; if not, one is open to legal challenge and so forth. Clearly, that is reflected in the Bill.

I am very keen to make sure that the guidance that comes out once the Bill goes through is very clear and designed to help charities, and that we do not assume that charities have legal or fundraising specialists. Many of the charities that we are trying to help are small community charities involving a handful of people engaged in good work. We want to make sure that the Bill is easily digestible by them.

As well as the websites, guidance and so forth, there will be—actually, there already is—a free HMRC phone line and other sources of information. I am keen to make sure that the guidance is easily accessible.

May I turn to clauses 6 to 8, which are about community buildings? I want to make sure that I have understood them correctly. I am president of the Banbury Sea Cadets, a charity. Do I understand that the Banbury Sea Cadets will be able to raise up to £5,000 in respect of the building in which they operate in Banbury and an additional £5,000 for all donations made outside the building? Walk me through how I can make sure that all the charities I am involved with get a double-dip.

Sajid Javid: I wish that you had not used the phrase “double dip”; I was with you until then.

The intention is that there should be a £5,000 limit for each charity. That was our starting point—but with a big exception, which was how we got into the community building rules. When we delved into those, it was clear that some charities were organised differently and had a different type of structure: in effect, with many little branches of a parent charity, but with each branch engaged in separate local community activity. One example is usually the Catholic Church, but let us say the organisation of the Church of England, which tends to have separately registered local charities.

Q 99

That is very clear. So it is £5,000 per charity—no more than that.

Sajid Javid: It is £5,000 per charity, unless that charity has separate branches that fit within the community building criteria, in which case it is £5,000 per branch.

Thank you

Q 100

Mr Edwards, you are the head of the charity section at the Treasury. Can you tell us how many staff it will take to implement the scheme and to manage it on an ongoing basis?

Andrew Edwards: I am head of charities at HMRC, not the Treasury.

Even more important.

Andrew Edwards: There are approximately 190 of us in HMRC charities. We will get smaller over the coming years, as will all Government Departments. We are slimming down and expect that there will be about 150 of us in a couple of years. Those 150 will manage the gift aid scheme and this new scheme.

The new scheme does not require many extra staff because it is being brought in at the same time as we are introducing a new IT system for gift aid, which we have designed with this scheme in mind. For example, charities will be able to claim online. At the moment, charities  have to claim by filling in a paper form, which they send us, and then we have a number of people processing those forms. That function will go and it will all be done online.

We have separate auditors and compliance staff who already do all compliance work on gift aid. As part of that, they will do audit and compliance work on this small donation scheme. Because of the way the scheme has been designed to mesh with gift aid, it can be administered almost as a part of gift aid. Yes, there are pressures and there will be extra things that we need to do for which we do not have extra resources. We will have to absorb those and deal with them as part of our day-to-day work.

Q 101

You are clearly very concerned about the level of risk of fraud. Presumably, as a result of your worries that affected the way in which you designed this scheme, you had a look at the Awards for All scheme run by the Big Lottery Fund and advised Francis Maude and other Cabinet Office Ministers that they needed to tighten up the eligibility criteria for accessing that scheme, because they are substantially less tight than those that you appear to propose to implement under this scheme.

Andrew Edwards: If the national lottery or the Big Lottery Fund want to ask us for advice, we will willingly give it, but we have not given that advice. That scheme is different, and I do not know enough about it to know how it is run, what criteria are applied and what the fraud risks are. The way we operate gift aid is on a risk basis. We have various triggers looking for the riskiest things. Fraud is a problem. Typically there are two sorts of fraud. There is fraud within an established charity that has been around for a long time. That is a bit like the one I referred to earlier—

Q 102

Forgive me for interrupting, Mr Edwards. So there was no joined-up Government thinking and no attempt to look at best practice. Regarding this sum of money—£1,250 maximum for charities—nothing was done to look at what else other Government Departments allowed to happen to make the impact on the small charity that might apply proportionate.

Sajid Javid: May I come in on that, because there is joined-up Government thinking. As I understand the scheme that you cited as an example, it is a subjective scheme in which there is a decision-making process about what payments are made to what charities. This is an objective scheme—a rules-based scheme—so there is no limit to the number of charities that can take advantage of it. As long as they meet the rules, they can benefit from the scheme. I think that you are comparing two entirely different systems.

Q 103

I welcome this excellent scheme, which has been a long time coming and will do a great deal of good. I talked earlier about the number of people coming out of income tax over the next couple of years as the allowance is raised. Has a calculation been made of the reduction in the gift aid that might be claimed as a result of people who were taxpayers no longer being taxpayers, and hence no longer being eligible for gift aid reclamation?

Sajid Javid: I am not aware of such a calculation.

Andrew Edwards: We have figures for gift aid over the years, and it has continued to grow even though the personal allowance to which you are referring has gone up. However, looking forward, we have not done any modelling.

Q 104

As a supplementary to that, have you done any calculations on how much additional gift aid you expect to be reclaimed on the back of the fact that many charities will begin to look at registering to reclaim gift aid as a result of this system?

Sam Anderson: We have made some assumptions around behavioural change, which is what you are talking about—more people taking up gift aid than would have been the case without this scheme. At the moment, as I said earlier, we are testing those assumptions with the OBR, and they will be dealt with through the autumn process.

Q 105

What sort of order are we talking about? Would you be looking at perhaps an additional 50% on top of what this scheme will generate that will go to charities.

Sam Anderson: That sounds rather high, but I am a bit reluctant to comment in more detail until we have been through it properly with the OBR.

Q 106

But you certainly expect some form of increase in the amount of gift aid reclamation purely because of this scheme?

Sam Anderson: As it is an additional incentive and it is worth money to charities, it is reasonable for us to assume that there would be some additional gift aid applications resulting from it.

Q 107

On Second Reading, I raised concerns about the fact that hospices, which rely largely on donations from the public, would be excluded from benefiting due to the community buildings restriction on residential use. Has the Minister given that further consideration?

Sajid Javid: Yes, I have given it consideration, so I hope that I can clarify the situation. The residency issue around community buildings does not really apply to places such as hospices—or hospitals for that matter. They are places of care. Far more often than not, when someone sadly has to go into a hospice or a hospital, they maintain their own residence. They will be at the hospice for only palliative care and, as far as we are concerned, that is not their residence and therefore the residence restriction would not apply.

You raise a fair point, because it goes back to the point about trying to be clear in the Bill and also trying to clarify legitimate questions of the kind that you raise. That is why we are keen that such issues are also made clear through the guidance.

Q 108

That is very helpful.

In your report on the public reading stage, you confirmed that not every building in which a charity operates will be classed as a community building and that decisions will need to be taken on a case-by-case basis. A little earlier you said that the guidance needs to be as clear as possible. Particularly with the increasing elderly population,  will the distinction blur between a hospice and a care home run by a charity for those who are coming towards the end of their life? How can you ensure that we do not end up down the road of unwelcome disputes or even costly litigation on this issue?

Sajid Javid: It is fair to say that we intend to monitor that situation carefully. When interpreting the Bill, there will be some element of not discretion, but common sense. If guidance needs to be made clear or adjusted over time, that can be done.

Q 109

I am delighted to hear that you managed to catch the £500,000 fraudster. However, could you tell me whether that fraudster had made successful gift aid claims?

Andrew Edwards: Yes.

Q 110

Does that not therefore prove that the fraudster would have got through initially under these criteria, whereas small charities that have not made gift aid claims will not?

Andrew Edwards: As I was saying earlier, we see two sorts of fraud. There is the fraud when someone infiltrates an existing charity and makes fraudulent claims, as in this particular case, but the much more common one is when fraudsters seek to set fake charities. They will download from the internet a basic charity constitution, send it to us and claim that a charity has been set up. You have to approach those two examples in a different way. If you have an established charity that is basically good, but has been infiltrated by someone who is basically bad, we need to try to identify that person and limit the damage they can do. In the other cases, which are basically a complete sham, we seek to shut the door and not let them in at the start. There are two different sorts of fraud that we have to approach them in two different ways, but that does not necessarily mean that, as a result, genuine small charities will be disrupted. It is true that a new small charity that is set up will have to wait three years before it can join the scheme, but any new charity that is set up will have to wait three years.

Q 111

But, effectively, a clever fraudster could probably claim gift aid, so in a sense that is my answer.

May I raise a further point that was made on Second Reading by a Conservative Member, Mr Stewart of Milton Keynes South, about a talking newspaper charity that was set up by his father? Mr Stewart said that the charity was very small, and that if it raised £1,000 a year, it was doing well. He said that many of the people who gave to it had visual impairments, and that while it was a free service, many people made donations of £5, £10 and so forth. He said that many donors were elderly and therefore

“not the kind of people who generally fill out gift aid forms.”

He went on to say:

“I do not know whether the charity my father set up…has ever claimed gift aid, but I suspect that it has not. Therefore, it would not be able to take advantage of the proposed scheme for three years.”—[Official Report, 4 September 2012; Vol. 549, c. 194.]

There really are stories like that.

I suspect that there is a major difference between the types of fraudsters. While it is clearly something that needs to be investigated, I suspect that it is not difficult to get through the gift aid criteria and claim—you would have to be a fairly stupid fraudster if you could  not do that. However, what about small community groups such as the one that Iain Stewart mentioned? Should not they not be eligible for this scheme?

Sajid Javid: To go back to your first point, you may be saying that the fact that there is already fraud going on with gift aid shows that someone could get into this system, but there will always be fraud under any of the tax rules. There will always be committed fraudsters out there who want to do wrong. You are not going to invent a system of checks that will eliminate fraud 100%—that is just a fact of life. If your goal was to eliminate fraud 100%, you would wrongly end the ability for legitimate users to take advantage of this scheme, and clearly that is not our objective. Our objective is to strike the right balance by creating incentives for small community charities and giving them a financial boost through this top-up system while trying at the same time to eliminate fraud as best as we can. Even with the rules that we have, we are not pretending for one second that fraud cannot happen. Clearly that is not possible, because a committed fraudster can try many ways and go to great lengths. Our job is to ensure that the hurdles are high enough to eliminate a lot of fraud, but not so high that they prevent legitimate charities from taking the benefit of this.

Q 112

But surely unless this is considered—this is the point that Mr Stewart and others have raised—very small charities and community groups will be at a disadvantage under the scheme. While I really welcome what the Bill will do for churches—it will be extremely beneficial—there are clearly small charities that will be at a disbenefit under it.

Sajid Javid: It is wrong to say that they will be at a disbenefit. It will not make their situation worse. Your point is that the Bill will not help the type of charity that you describe, but I think that you would accept that if the rules were changed to allow such a charity to benefit—that could be a relatively new charity, or such a small charity that it had no history of using the current gift aid process—it would open up the scheme to everyone, which would allow the fraudsters to benefit significantly as well. I think that you would agree with me, as a guardian of the public purse, that we have to strike the right balance.

Yes, but I do not think that that is it.

Q 113

Minister, a number of witnesses have told us that charities will benefit from this, but they also suggested a few changes. It was said that we now live in a digital age. Was any consideration given to other ways of raising money, such as the use of credit cards or texting? A small charity might use such methods because they are easy.

Sajid Javid: That is a good question, and consideration was given to that. To answer the question we really have to look back at the starting point of the Bill and why it was introduced in the first place, which was to deal with the issue of charities, especially small charities, receiving cash donations when the people making those donations were not, for various reasons, filling in the forms that would be necessary to go through the gift aid process  and get a financial boost. When there are some types of non-cash donations—it could be the use of credit cards or cheques, and we have heard mention today of using Oyster cards—you are already, by moving away from cash, establishing a relationship that is not that far removed from the gift aid process. For example, if someone is willing to use a credit card, cheque or even a text message, the use of that process means that the information is already there, so it is not too far removed from the current gift aid programme. Although that will bring the same financial benefit to the charity, a donor in a higher tax bracket using gift aid would have a higher financial benefit, which may mean that they would give more than they otherwise might. It is the existence of that extra information using the alternative payment methods that has made us think that we should really be focused on cash donations.

Let me give you an example. I recently had a discussion with a representative from one of the large mobile phone companies in the UK, who said that under the company’s text message system for charitable donations, once someone uses their phone to make a donation, which the company makes as easy as possible, it only requires one more text to confirm that they are a UK taxpayer. When that has been confirmed once—and only once in an entire calendar year—the phone company will use that information for all other donations to registered UK charities, so the gift aid system will automatically kick in. That is an example of how certain methods can benefit from the gift aid system. We did not think that such an approach was necessary under the Bill, and it would move away from the objective, which is to deal with small cash donations.

Q 114

One of the issues that was raised earlier today was the three years. Did you, in your analysis of this, see a big difference between two years and three years, and why did you discount two years? I believe that there should be some history of the gift aid process, but why is it three years?

Sajid Javid: When we decided—the difference between three years and two years is not just fraud; there is also a difference in terms of the cost to the Exchequer, which we clearly need to manage as well—we looked at both the cost to the Exchequer of making the scheme more generous and the potential increase in fraud. It was our judgment when we put the two together that the right balance was three years.

Q 115

I want to touch on a couple of issues that came up in the previous evidence sessions. The first is about charities that do not have a diverse fundraising portfolio and that are largely reliant on tin-rattling falling foul of the three-year criteria, and the second was about the missed opportunity of encouraging small charities to take the leap and get involved with gift aid. It has been a trend in the sector over the past few years to almost discourage those very small micro-charities being set up. Rather than a family that has lost a child to a particular disease setting up a charity in their name, they are contacting a larger existing charity and founding an appeal in their name or funding their research programme.

I do not necessarily want to present those negatives as an upside, but it strikes me that there might be an upside. Have you thought about how this will affect  some of those charities being set up and whether they are set up as individual charities, or whether this would act as an incentive for them to not be set up, but for those people instead to approach other charities that might be able to make use of this and other schemes? Did you have any thoughts about that when you were creating the Bill?

Sajid Javid: We did. These kinds of behavioural changes, by their very definition, are hard to predict. If I understood you correctly, one of the behavioural changes that you are predicting is that because branches of a single charity do not have to meet the individual requirement of the three-year criteria and the matching criteria, it may encourage some charities to have more of a branch structure going forward, rather than setting up individual separate charities.

Q 116

And for charities that might be set up in the future. I am thinking particularly of things such as medical research, where, in an effort to get more bang for the cause that many charities might be working towards, the sector tries to get them to be part of a larger organisation, rather than there being other organisations set up, particularly at a local level, that compete. That would benefit from your reform.

Sajid Javid: That is a good observation. If that were the case, there is no problem with that, because the primary reason for the eligibility criteria is not to reduce the number of charities that can take advantage of this legislation but to deal with the fraud risk. Say an existing charity has set up a new branch. That branch, by definition, although it has to meet the community building criteria and other criteria, would not have to meet its own criteria in regard to using gift aid in the past. That is not a problem, because we want to encourage greater charitable activity through the Bill and we want to give that financial boost. The primary reason to have those rules around gift aid is to deal with the risk of fraud. The example that you presented, as I understood it, does not increase the risk of fraud.

Q 117

Before I ask more practical questions about the Bill, I want to ask for some clarification or reconciliation between two earlier answers. We were told that the estimated cost would be £100 million and that those estimates would go to the OBR and so on, so we were told that that had been factored in and we did not need to hear the details. Subsequently, however, when the question was asked about what the consequence was of the cost in relation to gift aid—what extra cost there would be in terms of gift aid—we were told that that had not been factored in and that there were no costs available. If it is going to be £100 million extra cost, surely that does take in the extra cost to gift aid. If these charities are going to be claiming this money if they are also claiming gift aid, is the gift aid extra to the £100 million or is the gift aid a known sum within the £100 million?

Sajid Javid: I can clarify that. The £100 million number, which is the benefit, we think, to charities once this scheme is up and running, was based on the original Bill as you see here without the Government amendments that we have recently tabled. We have not yet published the number once these amendments go through, because  they add greater flexibility of certain definitions and we expect that will lead to additional cost for the Government. We cannot publish a number on that yet, because, as is normal practice, before we publish a number we have to run it past the OBR to verify it. Once that is done, we will publish that number.

Q 118

Yes, but as long as the Bill has been in existence, participation in and receipt of gift aid has always been the qualifier for—

Sajid Javid: As a result of this legislation, any—

So the £100 million is not just for top-up payments? It includes top-up payments and extra gift aid.

Sam Anderson: The £100 million is a net figure, so it takes into account what we thought would happen at the Budget. There is a lot going on here. You can have people claiming less gift aid and more small donations; you can have people claiming more gift aid because they are incentivised into the scheme and you can have people claiming more gift aid because of the matching requirements. So just to take a step back, at the Budget we costed a model that was much more basic than the shape we now have the policy in. It is much better developed. Not all the factors that I just mentioned were fully taken into account in the costings we published earlier, but they will be taken into account in the new costings. So the matching requirements, for example, will be taken into account.

Q 119

I still think there are big questions around the £100 million figure on the basis of all we have heard. Sticking with the issue of gift aid as the qualifier, I accept that the Government need to scam-proof any generous measure that they are introducing, including those in relation to small charities. But why do you see gift aid as being the only verifier that there can be in relation to charities? There are bona fides and donations. Are there not other ways of verifying this other than gift aid?

Sajid Javid: One can suggest other ways. We have looked at various ways and we think using HMRC’s existing data assistance that they have developed over the gift aid programme is the best way. There are lots of reasons for it; the main reason is that if you go back to the genesis of this Bill, it was all linked with gift aid. It was where people were making small cash donations to charities that were not able to provide the information required for the gift aid programme, so this was seen as a scheme that complemented gift aid. As such, it makes absolute sense to link it to the current gift aid system and to have it administered by the same group of people.

Q 120

There are many local charities that we know have not historically participated in the gift aid scheme, partly because of the nature of the areas in which they worked. The population from whom they would draw a lot of their income were not going to be people who would be interested in applying or able to apply for gift aid. We also hear from some charities that there is a bit of a switch-off with gift aid, not just because of the form-filling but because people start to suspect that once they fill in a form and give their  details for gift aid they will then be hit with raffle books coming at them through the post and that all sorts of other demands will be made on the back of the information that is yielded to charities for gift aid. There are lots of different reasons why either charities or donors are averse, to one degree or another, in relation to gift aid.

Insisting to charities that in order to benefit from this scheme they have to go down the route of gift aid when it may not be particularly feasible for them seems onerous. It is one thing to put in qualifying criteria, but when those criteria have the effect of disqualifying bona fide charities that we all know, surely we as legislators have a duty to try to come up with a better way through for those charities.

Sajid Javid: I think that your principle is correct and it is well-intentioned, but I think you would agree that as legislators we also have a duty to help to protect the public purse. It might help if I gave some numbers about the charities that would benefit from this legislation. Again, we do not know exactly yet and we will not really know until the legislation is in place, but according to the Charity Commission there are about 180,000 charities in the UK. Of those, about 100,000 are already registered on HMRC’s database and of those 100,000 about 65,000 claim gift aid each year. That is a substantial number of charities.

Of the 180,000 charities, that is just over a third.

Sajid Javid: It is, but there are 100,000 charities that are registered with HMRC in its database, which is more than half of all the charities. Of those 100,000, approximately 65,000 claim gift aid each year, because some charities use the gift aid system but they do not use it each year.

You would be right to say that there are some charities that are maybe too small—such as the example that you gave—and where they do not register for gift aid, have never used it and they would not be able to benefit from this legislation. They will not be any worse off; they just will not be able to benefit from this legislation. However, I hope you would agree that the legislation is a great starting point, and that there are thousands and thousands of charities out there that will be able to benefit from it.

Also, when the Government first introduced this legislation, or first talked about it, they made it clear that they will review the operation of the legislation after three years. I think that that would be a good time to look at exactly how it has worked out, and at the pattern of use in terms of charities that are already registered for gift aid and that are using this scheme, but also to see if it has encouraged charities to use the gift aid system. I hope that you agree that it is sensible to have a review period and I know that you will still be here when the legislation is reviewed and that you will have another opportunity to raise some of these excellent issues.

Q 121

But just on that point, in committing to the review, would you accept a review clause in the Bill?

Sajid Javid: We will not accept any more clauses in the Bill, other than the ones that we ourselves have suggested. I do not think that it is necessary to have a review clause in the Bill. The Government have already said, as I believe is standard practice for new tax legislation,  that we would review it after three years. I think that was what was done under the previous Government as well.

Under Standing Order No. 83C (11), I have the discretion to allow the questioning of the last group of witnesses at an afternoon sitting to continue for a further 15 minutes. Therefore, we shall continue until 5 pm.

Q 122

Will the Minister explain the rationale for Government amendment 6 to clause 6, which he tabled, regarding who is eligible to be considered as a “group member”?

Sajid Javid: Just to be clear, are you referring to the definition of “charitable activity”?

Q 123

I would like to probe the issue of charitable activity, but I wondered why there is that specific amendment. Just to be helpful, the explanatory statement says:

“This amendment, and amendments 4 and 5, have the effect that small donations collected in community buildings do not count towards the “community building amount” for the purposes of clause 6 unless they are collected from persons with whom the charity is carrying out the charitable activity.”

In lay person’s terms, could you explain what that actually means? Who is able to donate, and who is not, for the purposes of the top-up payments?

Andrew Edwards: I will cover that. We identified a problem with the previous legislation in that, for example, it would have been possible in a large building for a meeting to take place that qualified the building as a community building—in other words, the 10 people were meeting in accordance with the legislation—but for a collection to be going on in a separate part of the building that would qualify under the Bill. That was not the intention, so, while making a few changes to the rules, the amendment clarifies that the collection has to be made in the meeting. The meeting that qualifies the community building as a community building, where the beneficiaries come together to benefit from the charitable activities of the charity, is the place where the money has to be collected.

Q 124

So, just to be absolutely clear, if the meeting, the charitable activity, is taking place among the 10 members and someone else in the building happens to think, “That is an excellent charity, and I would like to give them a tenner,” that tenner does not count for these purposes?

Andrew Edwards: That depends on the structure. We are just talking about the community building element. You have to remember that every charity has a £5,000 allowance. Some can also claim additional amounts for the community building. That tenner would probably qualify for the £5,000 national allowance, so it might qualify depending on the number of other donations.

Q 125

May I ask another question?

So long as it is not too specific, because we are meant to discuss general issues now.

I will try to make it general. The question is on the definition of people who are the beneficiaries of activities. Will the Minister or officials explain again—sorry, this perhaps does veer into the specific clause, but I think it is important to probe some of this.

You will normally have an opportunity to do that later in the week.

Q 126

How will you deal with charities that make mistakes, as opposed to fraud? A couple of subsections of clause 2 refer to penalties. Will you talk us through the process that you might use to judge whether someone has made a deliberate error, veering towards fraud, or an innocent mistake?

Andrew Edwards: There are a number of examples. Frequently, when a charity makes an error it will realise and write to us or phone us and say, “I’m really sorry, but I’ve made an error. Can I correct it?” It might be that we spot an error when we are checking one of the claims in an audit and, after discussing it with them, it is clear to the HMRC officials that it is a genuine error. There is an element of judgment here. Again, it depends on the nature of the organisation and the people you are dealing with, but HMRC likes to think all its customers are compliant and want to comply. Our starting point is to assume that they are compliant and want to comply, unless we identify evidence to the contrary. If during the course of that questioning, or during the course of examining the records, it becomes clear that it does not look like an error, it moves into the fraud arena.

Based on the numbers I gave you earlier, it is obvious that we treat most things as error, not fraud. On the whole, our customers are compliant and want to get it right, and if they get it wrong, they are open and honest about it: they tell us about it and we put it right. It is very easy for them to do that. The numbers who actually pay a penalty at the moment are quite small, and we anticipate the numbers who would pay a penalty in the future will be very small. You do not pay a penalty if there is an innocent error; you only pay a penalty if there is, for example, an element of fraud or a deliberate mistake.

Q 127

That space between deliberate error and genuine mistake is sometimes contested. How do you allow independence of judgment in that process? Is it just a matter of how you feel when you wake up in the morning, Mr Edwards, when one of your staff brings an example to you, or do you go to a Minister or talk to others who give money to charity? How do you reach that judgment and allow someone to have a genuine review?

Andrew Edwards: We have a number of internal processes whereby people can object or complain about a decision. If a decision has been made, and the charity disagrees, it can ask for it to be reviewed internally, or by a more senior person. There is a formal appeal process whereby it can ask a tax tribunal to intervene, or it can go to the adjudicator’s office. Some charities may raise the matter with the Minister but obviously, for reasons of taxpayer confidentiality, we cannot do that first. Generally speaking, there are a number of internal review methods or formal review methods, such as tax tribunals, that allow people to appeal or to ask for a review if they are unhappy.

We do not end up there very often, because most of the time we work with customers. Most of our customers are honest, and we work with them to come to a compromise, or we agree the best way forward. Our emphasis is always to make sure they do not make a mistake in future. Yes, we have to put right what happened in the past, but we like to ensure that they put in place a process to stop a future error. That is what our focus always is.

Q 128

I represent a border constituency. It is not uncommon in Northern Ireland for various churches, not just Catholic churches, to have cross-border parishes, and many local charities have cross-border engagements. Some do not, but in the course of their collections they may have euros going into the tin simply because many of my constituents go over the border for family and other reasons, such as buying petrol and diesel and often that is the currency they have to hand. Will there be an issue or problem for charities about what counts as a cash donation? People may have to consider the denomination of the notes and whether they are £20 or £50 notes, but will there be an issue about whether the currency is sterling or another currency?

Sajid Javid: You can give in any currency, but clearly the limit of £20 or the equivalent still applies. You gave a very good example, and I am sure it is prevalent in that border area. The total cap of £5,000 will be the amount that HMRC takes when looking at what the sterling balance is when it has been banked.

If Members have no further questions for the Minister, we conclude our business for this afternoon. The Committee will sit again for clause-by-clause consideration of the Bill at 11.30 on Thursday in Committee Room 9.

Ordered, That further consideration be now adjourned. —(Greg Hands.)

Adjourned till Thursday 18 October at half-past Eleven o’clock.