​SCVO's Ruchir Shah argues that we should be vigilant over Scotland's Gift Aid settlement

Gift Aid, introduced in the 1990s, is an enormously successful scheme worth around £1.3 billion across the UK, probably around £100 million for Scottish donors.

And even more importantly, it gives the reassurance to the donating public that all of their cash to charities goes to charities, without a tax take being diverted to the Treasury's coffers.

But Gift Aid is predicated on a single income tax regime across the UK. Current plans for further devolution will hive off the employment-based income tax to Holyrood, while the savings and pensions-related income tax will remain UK-wide.

When the Smith Commission proposed income tax devolution last year, it simply overlooked the impact this would have on Gift Aid. But it creates all sorts of problems if the rate of tax diverges north or south of the border.

In particular, it risks confusion and a loss of trust of donors in the system, and in the long-term less people giving to charity.

We can't wait and see - we need to be proactive and ready to rethink our approach to Gift Aid under devolution

Ruchir Shah

The problem is as follows. If there is a higher rate of income tax in Scotland, then taxpayers will not see all of their donations going to the charities they support unless they fill in tax returns, which most won't.

The taxed component will go to the UK Treasury, which will also miff the Scottish Government.

Conversely, if there is a lower rate of income tax in Scotland, the UK Treasury will be effectively topping up the donations to the charity, and it may seek recompense by cutting the Scottish budget, which will miff the Scottish Government and affect public services.

Meanwhile, those donors that need to pay lots of UK tax because they have lots of savings or pensions income, at the same time as employment-related income tax at the Scottish rates, are just going to get totally confused with the Gift Aid arrangements. Altogether, the coherence of the Gift Aid scheme starts to break down.

Of course, all the above is only a problem if the tax rates do diverge. Scottish finance secretary John Swinney MP suggested earlier this year that he may need to use the transitional powers coming in next year to increase income tax across all bands by 1%. More recently, the first minister hinted that they are not going to vary the taxes until the fuller income tax powers come in 2018.

The Scottish Council for Voluntary Organisations (SCVO), with the support of the UK Charity Tax Group, has now pushed this issue to the top of the agenda with the Scotland bill.

UK ministers had initially positioned this as a "wait and see" problem but are now putting this nearer the top of the Treasury's in-tray.

Meanwhile, the Labour shadow Scottish secretary, Ian Murray MP, recently put forward amendments to the Scotland bill to ensure a commitment to review the future of Gift Aid under devolution is incorporated into the face of the bill, something SCVO had called for in it response to the bill.

SCVO believes that we can't “wait and see”. We need to be proactive and ready to rethink our approach to Gift Aid under devolution, and whether a new scheme needs to replace it.

The recent spotlight on how charities relate to their donors on fundraising regulation has shown us one of our sector's most important assets is the trust our donors have in us.

If they can't be assured that the system that gets all their giving to charities is robust, then we risk this trust.

Ruchir Shah is policy manager at SCVO.