A word of warning if you are about to file your tax return...

The summer is now over and the guilt you feel when you look at the unread pile of post from your accountant has become overwhelming. You resolve to spend Sunday afternoon preparing the information needed to file your tax return. Unfortunately your diligence may be misplaced.

If you think you might make substantial charitable donations before the end of January, you should consider submitting your tax return as close as possible to the 31 January 2012 deadline. Why? Because if you file your tax return before you make the gifts to charity, you will be unable to claim gift aid relief against your gains and income from the previous tax year. That could be very expensive if your current year tax liability is much smaller than last year’s and you therefore need to use the carry-back option to benefit from full gift aid relief.

Last year a successful farmer found this out to his cost in the case of Cameron v HMRC. Mr Cameron made substantial capital gains towards the end of the tax year. He diligently submitted his tax return in the summer and then went on to make a large charitable donation in the following January. Because his tax liability in the year he made the donation was considerably smaller than in the previous tax year, Mr Cameron tried to elect for his January charitable donation to be carried back and set against the gains he had made in the previous tax year.

On appeal it was held that Mr Cameron could not take advantage of this relief, because the election would only be valid if made before or in his original tax return. This was the case even though Mr Cameron had not even made the gift to charity at the time he filed his return in the summer. He was not allowed to make the election on an amended tax return and he therefore obtained no higher rate relief for the gift aid payment against his original capital gains tax bill.

In this case Mr Cameron was effectively penalised for filing his original tax return promptly. Gift aid can only be carried back to the previous tax year if the tax return for that year has not yet been filed.

If Mr Cameron had waited until the last minute to file his tax return, the gift aid carry back claim would have been allowed. To avoid this unfairness, we would recommend that you consider delaying filing your tax return until after you make any large charitable donations.

For further information, please contact Andrew Goldstone.