The Public Accounts Committee is having a hearing on Gift Aid this afternoon. I made my views on this known a year or so ago. As I said then:
* It is completely illogical that some gifts — including many legacies to charity — get no tax relief at all.
* It makes no sense at all — and reveals a belief by many that the wealthy count for more — that their hypothecation of government funding to charity carries more pro rata worth than the giving of basic rate taxpayers and those who do not pay tax at all.
* Large donations to charity are not necessarily benign because of the influence they carry and the work they can prevent, especially when it comes to questioning the reasons for poverty.
* It is as a result obvious that all higher rate gift relief to charity should be abolished — and all inheritance tax relief to0.
* In place of these reliefs all gifts to charity of less than £5,000 should be subject to automatic gift aid relief at 20% — meaning a charity could apply for 25p in the pound back on all these gifts with much, much less admin than now, and gift aid at the same rate should apply to all gifts whatever the source over that sum if shown to originate in the UK.
* The result would be more money for charity, massive savings in charity admin, vast savings in HMRC admin, a simplified tax system by far and more resources to weed out rogue charities.
This builds on suggestions made in 2008 for the TUC in The Missing Billions, where I wrote:
The next tax relief [needing] change appears controversial, but has the capacity to release significant resources for social benefit in the UK. This would be the result of abolishing the tax relief on gifts made to charity in the UK.
The current tax scheme for such gifts is absurdly complex, imposing a considerable administration burden on charities that could use the resources expended in managing tax reclaims much more effectively in pursuit of the good causes for which they have been created.
It must however be noted that charities do benefit from the existing rules that provide tax relief for gifts made to them. They recover income tax at the basic rate on all gifts for which they can secure documentation made from identifiable people who have confirmed they pay tax in the UK. It is this documentary burden that is onerous.
The arrangement is also discriminatory: some forms of charitable giving, such as street collections, are [in most cases] less tax efficient than others but all result from giving with charitable intent. It is strange that some forms of giving are favoured more than others.
The solution is simple. It should be assumed that all gifts to charities are made out of taxed income. This is, after all, highly likely to be true. The charity should then be allowed to make claim to the Government for a sum equivalent to the tax that would have been paid at basic rate. This would be a sum in excess of that charities can claim under the Gift Aid rules since not all that income is subject to tax relief at present. The result would be an increase in the income of UK charities and a massive saving in their administrative costs. Both would, surely, be welcome. The cost of the additional relief would be covered by the withdrawal of the current wholly anomalous situation where UK individuals paying tax at higher rate can actually enjoy a personal tax refund of the difference between the higher rate of income tax and the basic rate on the value of all gifts they make to charities: a tax relief from which the charities themselves get no benefit at all. By abolishing this relief another opportunity for tax avoiders, which has been subject to spectacular recent abuse could be eliminated.
Recent research by HM Revenue & Customs has shown no apparent influence of this tax relief on the decision of higher rate tax payers to donate to charity, or not, and as such it is unlikely that the value of gifts they make will be affected to any significant degree.
I will be curious to see what the committee recommends on this issue. I think what I recommend could save enormous amounts of effort by taxpayers, HMRC and charities and almost double the yield to charities.
What is there to object to unless you're wealthy and want to use the relief for your own gain?
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Agreed that a change like this makes sense. However this proposal would make fraud even easier – you could recycle funds through a ‘charity’ and wait for the cash from HMRC to come in.
But HMRC would have the resources to check that – they don’t now
And actually, that can be done now anyway
I remember conducting a straw poll on this a few years ago when this was under review. My sample were all the partners in the office of the national firm of accountants I was working for at the time, so a useful spectrum of (I assume) higher and additional rate taxpayers.
The question I set was, if higher rate tax relief was removed from Gift Aid, would this alter your pattern or amount of giving.
Resounding response…
NO.
For what it’s worth, I claim higher rate relief for my donations and gift that refund to a cause.. but I am just one person.
The whole charity sector needs reform.. not just the tax relief. There are far too many ‘special interest’ and state -funded ‘charities’ providing cosy sinecures for well connected people, and using their charity status to circumnavigate the democratic process.
Names?
I was thinking specifically of a number of ‘public health’ organisations who take NHS/EU money to peddle dodgy science and lecture ordinary people about their lifestyles, whilst calling for ineffective and regressive ‘sin’ taxes or other interventions which have no track record of success nor any public support. But that is just a personal bugbear. In the past you have alluded to the wealthy using charities to further certain aims, and I don’t doubt that happens.
I don’t necessarily object to what such organisations want to achieve, but I think they trade on the public perception of what a charity is, even though their own organisations are something very different. I think there is a clear class of organisation between ordinary companies (which seek a profit and/or are owned by private individuals who have the ultimate beneficial interest) and traditional charities, which are funded by public donations. Maybe it needs a name? It could even sweep up some of the oddities flying around in the tax/company statute books such as ‘eligible bodies’, ‘limited by guarantee’, and whatever status it is that (rightly) allows Unions to retain untaxed funds for their purposes? I’m just thinking aloud, as I’m not an expert. It just all seems rather complex and I’m not sure that suits anyone other than the usual crowd of accountants and lawyers.
Interesting thoughts that have led me to think some more on the post. Is it really that necessary to change the current system? All tax deductible expenses or claims differentially benefit higher rate taxpayers. Why limit restrictions only on charitable gifts, especially as the tax element can incentivise giving. As the CAF noted the repayments are the way the tax administration operates – nobody personally gains from making a charitable donation. http://givingthought.org/2013/11/21/the-nao-on-gift-aid-and-tax-relief-on-donat/
I’d be interested in seeing which charities are dominated by a few wealthy donors and prevent genuine understanding of poverty. My experience is that is the charities like Rowntree or War on Want who actually do that work. And if there are rich people with such motives are we sure the new proposals would stop their funding? Would it not be easier to beef up the compliance arm of the Charities Commission?
Reducing bureaucracy is a good idea but will it? Surely all the claims for tax refunds would still have to be made. And records kept for HMRC to check in any audit process? The NAO Report describes the current work (c.90 staff and yield of £63mn.)
I agree more funding for charities is needed. Every time the tax rates decline their income also declines. Are there any numbers of the value of charitable gifts that currently do not qualify for tax relief?
I think IHT is not really the same as charitable giving. It is certainly not voluntary or the occasion to exert influence, the assets in question much bigger, and many more issues such as business assets, lifetime gifts, transfers between married couples, and so on.
The idea that the rich do not benefit is dependent on the belief that the tax relief is reflected in the amount given
Unfortunately the evidence contradicts that so the premise of your comments is wrong
Sorry but on that single point I don’t follow. There was an example quoted on your blog taken from the Christian Aid website. As far as I can see the way tax relief operates is that in their example the charity gets £1000 from both taxpayers. That donation costs the basic rate payer £800; it costs the higher rate payer £600 because the example assumes higher rate taxpayers factor in the tax relief by donating more than their post tax income of £600.
In both cases the taxpayers are worse off financially. But unless the higher rate relief applied the higher rate payer might only donate their post tax income of £600. That means the charity would get less (£750).
http://www.taxresearch.org.uk/Blog/2013/09/03/tax-power-and-philanthropy/
But that’s not how behaviour works in practice
I’m not sure which behaviours we’re discussing. The NAO estimated 700,000 individual claims for Higher Rate relief worth £470mn. They calculate that individual donations above £100 make up 40% of individual donations, with 89% using Gift Aid. So i think people do use Gift Aid and do reclaim tax deducted.
Richard, you have presented this idea orally to meetings of charities. You reported that their response was negative and that they felt behaviours would change. Have you built that response into this post?
I do think you’re on to something here, but the devil will be in the detail and there will be many objections. So, if you’re serious, you will need to address those.
Time…..that’s all I need
And no, I have not built in great detail on the issue
OK.
Well, as I say, the Devil is in the detail. My personal starter for 10 would be the idea that behaviours of wealthy donors won’t change. You yourself have written that they use it for tax avoidance. Well, that is a tax-driven behaviour. Additionally, logic tells me that donors in different socio-economic strata dispay differing behaviours. There are those who give to collections when asked – no gift aid. Then there are the planned givers. These do use Gift Aid and might, if they’re higher rate, claim the difference on their returns. Then there are the wealthy – your top 1% if you like. They will be making specific large-scale payments, most probably gross and then claiming back the difference. Given your oft-stated opinion of the, you will agree that they are very likely to calculate the reduced tax advantage and adjust their net payments accordingly.
But as I have made clear – overall charities will win from my proposal by a greater tax relieved base, less admin and more gift aid
So what in that case that a few rich individuals pay less to their own rather selective good causes?
OK. As I say, I do think your idea has merits. But that last claim is empirically testable, as indeed is the claim that the behaviour of wealthy donors won’t change. The onus is on you to make your case to the charities; they, as you have yourself said, are sceptical about that very point.