UK: A Taxing Issue For Charities

Last Updated: 18 July 2012
Article by Adrian Wild

In his March Budget the Chancellor announced that he was planning to introduce a limit on all uncapped income tax reliefs with effect from 6 April 2013. In addition to business losses and interest, it was announced that the limit was intended to apply to charitable donations.

This came as a shock to the charitable sector, bearing in mind the Government's emphasis on the 'Big Society'. Furthermore, just two weeks earlier Danny Alexander, chief secretary to the Treasury, had said in a speech to the National Council for Voluntary Organisations: "We are committed to helping charities maximise the funding potential from donations. In particular, I recognise just how important tax reliefs for charities and donors are for the sector..."

The rationale for the proposals

The Treasury has shown the Chancellor statistics demonstrating that almost a thousand UK taxpayers earning more than £1m a year have a tax rate of less than 30% of their income. In addition, the Treasury also revealed that of the 200 taxpayers earning more than £10m a year, 12 are paying less than 10% in tax. There were also suggestions that some of the donations to foreign charities were not actually being used for bona fide charitable purposes.

In the Budget documents, the Government said: "Tax reliefs exist for good reasons, to promote activities such as business investment and philanthropy. But it is unfair that reliefs can be used without limit to reduce tax liabilities, so that some taxpayers with very high incomes have very low tax rates."

There were other indications that the move was really intended to help reduce the Government's borrowing. In a speech in April the economic secretary to the Treasury, Chloe Smith, told an audience of charity representatives and tax specialists that the proposed cap was part of a fair scheme to help ease the UK's national debt.

The industry's response

It quickly became apparent that the proposed cap on tax relief would have cost the charitable sector significant amounts of money. The Government estimated that the extension of the cap to charitable donations would have increased the tax take by £50m to £100m per year, which clearly would have represented a direct cost to affected charities.

But even more importantly, there was concern that this measure would discourage wealthy donors from giving. The ability to obtain tax relief on donations is unlikely ever to be a philanthropist's prime motivation for making donations, but there was grave concern that the proposed new rules would inevitably result in a reduction in total donations.

The charity industry responded swiftly to the proposal with one voice and over 1,000 charities signed up to the 'Give it back, George' campaign.

The campaign noted that 7% of the total donors contributed 45% of the total amount donated to charity, and any reduction in the income from these philanthropists could have had a drastic impact on the charitable sector's cashflow.

The charities also made the point that the proposal contradicted the Government's commitment to the 'Big Society'.

Budget U-turn?

To his credit the Chancellor listened to the industry's representations and on 31 May he announced that the proposal to include charitable donations in the planned cap on tax reliefs was to be dropped, before the formal consultation process had even started.

He said: "It is clear from our conversations with charities that any kind of cap could damage donations and, as I said at the Budget, that's not what we want at all. So we've listened."

This has been described in some quarters as "another Budget U-turn", but taking a more 'charitable' view this does show that the Government's Tax Policy Framework is working properly, whereby we now have proposals in the Budget, followed by a proper consultation process before the proposals become enshrined in legislation. The present system of tax relief for charitable donations will continue for the foreseeable future. This means that a 50% taxpayer who makes a charitable donation of £800 net will get a tax deduction of £300, irrespective of his other tax reliefs. In other words the effective cost to that individual of making a charitable donation will be £500 while the charity would receive £1,000 gross (including the 20% tax credit).

Other proposals

The Budget did contain some welcome news for charities, including:

  • a reduced rate of inheritance tax where 10% or more of a deceased person's net taxable estate is left to charity
  • simplification of the administration for claiming gift aid on charity shop donations
  • a scheme to allow tax reductions where pre-eminent objects are gifted to charities
  • the small donations scheme, which will enable charities to claim top-up payments without the need to collect gift aid declarations.

Conclusions

In many ways, George Osborne has an unenviable job: to have a chance of stopping the UK going the way of Greece, he must make substantial reductions in the Government deficit. He plans to do this by increasing the tax take by more than the increases in Government expenditure.1

At the same time, company tax rates are being cut to ensure that the UK remains attractive to international business. The Chancellor therefore has limited flexibility in what he can do and (to borrow a phrase) "every little helps".

For the charitable sector as a whole, the success of the 'Give it back, George' campaign is welcome, as is the demonstration of the significant support which the sector enjoys.

However, charities should not assume that the status quo will continue: the debate did flush out arguments for the cap with one comment in the Daily Telegraph stating "A lot of 'charities' are pretty useless ... tax breaks ... should go".

While it is for the regulator to identify and act on any misuse of charitable funds and for HMRC to police the misuse of tax reliefs, charities can perhaps do more. In particular charities should be vigorous in explaining how the tax reliefs obtained are used to promote the public benefit, including, where possible, quantifying the reliefs and the value of the outcomes achieved.

It would also be most welcome to see a government-sponsored drive promoting the social and tax benefits of charitable giving, and providing direction as to where information on such matters can be found.

Footnote

1 Taxation is forecast to increase from £550bn for 2011/12 to £704bn in 2016/17, an average increase of 5% per annum, whereas expenditure is forecast to increase from £696bn to £756bn, an average increase of 1.7%. Allowing for other inflows and outflows, the public sector borrowing requirement is expected to fall from £124bn for 2011/12 to a modest £21bn for 2016/17, at which time the total accumulated debt will be nearly £1.5trn.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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