My answer to the current tax dispute is very simple.
I am happy for anyone to give an unlimited sum to charity.
Let's be clear though - I see no reason why they should have higher rate tax relief on those gifts which gives nothing at all to the charity as a result. Remember - all the higher rate relief goes to the donor.
And at the same time I argue that all charities should have the right to reclaim basic rate tax on all donations arising in the UK without the rigmarole of gift aid tax relief - resulting in a massive simplification in their tax and admin affairs.
Now why can't we do that?
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I think the whole charity thing needs examining there are after all nearly 200 000 registered charities and it can be misleading. Dont forget adam werritys charity involvement which turned out to be a right wing think tank.And there are many more examples.
I might mention that the Tax Justice Network is not a charity!
How does this stack up for you.
I would like to see the higher rate tax relief given to charities, as is the case for standard rate tax payers.
The current situation
Current HMRC guidelines state (HMRC website)
“Claiming back higher rate tax
If you pay higher rate tax, you can claim the difference between the higher rate of tax 40 and/or 50 per cent and the basic rate of tax 20 per cent on the total ‘gross’ value of your donation to the charity or CASC.
For example, if you donate £100, the total value of your donation to the charity is £125 – so you can claim back:
£25 – if you pay tax at 40 per cent (£125 × 20%)
£37.50 – if you pay tax at 50 per cent (£125 × 20%) plus (£125 × 10%)”
With the announcement in the 2012 budget to replace the 50% tax with a 45% rate, the total relief would now be £31.25 for the highest rate tax payers. Please note that all the examples below are based on donors paying the higher rate additional tax rate at 45%.
According to HMRC £360m was claimed back in 2011-12 by Higher Rate Tax payers from gift aid and covenants. Many individuals fail to claim, however, especially for smaller donations (see example 3 below).
An opt in/opt out system for higher rate tax payers making a charitable donation
1 Donors could tick a box to opt out of receiving higher rate tax relief and instead allow the charity to receive the tax relief. In this case the cap on tax relief would not apply.
Example 1: With a simple additional tick of a box, a £1m gift from a donor who pays tax at 45 per cent would be worth an extra £312,500 in addition to the £250,000 the charity already receives under Gift Aid.
Under the opt-out system:
£1m gift becomes worth £1,562,500 to spend on our beneficiaries.
Example 2: By donating the Gift Aid under the current system, the donor needs to give £800,000 to make a £1m gift.
Under the opt-out system:
To create a £1m donation to charity, a donor who pays tax at 45 per cent would give £640k.
2 Donors who wish to receive the tax relief themselves would be subject to the proposed cap, enabling HMRC to prevent abuse and fraud.
3 Most charities are dependent on smaller, often regular gifts from all sectors of society. Higher rate tax payers making a modest donation of any size should also be included in the scheme.
Example 3: A donor who pays tax at 45%makes a regular £5 a month (£60 a year) which is gift aided. Such a donation with Gift Aid is currently worth £75 a year to the charity.
Under the opt-out system:
with just one tick, the same donation would become worth £93.75 to the charity.
4 87% of people are not higher-rate tax payers and cannot claim back tax for themselves on their generosity. This scheme provides a level playing field.
All good tries
No problem
I think my proposal on the blog is even simpler….
It has been said that George Osborne is attempting to prevent individuals from giving to charities. This is not true, as they can still give whatever they like. What he has done is capped the amount that taxpayers will be giving.
For once, George (no friend of mine, I assure you) has got it (at least partially) right. What is wrong, then? The answer is that the tax relief cap for all donors to charity should be zero. Why should the state get involved in redistributing taxpayer’s money to “charitable” organisations, dependant on the choices made by those “lucky” individuals who have money to spare.
Also, this would save tax resources which could go into other tax endeavours, such as chasing down more tax evaders/avoiders.
And, after all, what could be simpler than my proposal?
Of course, there is more to it than this, but as you don’t have the benefit of Reed’s Equivalence Principle, or the RBK Fundamental Tax Theorem I don’t necessarily expect you to understand the implications of my proposal. [this is why, Richard, you got ISAs wrong this morning]
But please come back with any criticisms. The principle is totally sound, but I am sure that there will be practical issues that will crop up along the way. We may not be able to resolve all tax injustices, but this one we can and must.
I would argue for two tiers of charities: those that do social good (uncapped) and those that I consider bogus similar to Liam Fox’s defunct/exposed Atlantic Bridge, private schools etc. (no Gift Aid)
I would argue for the second tier not to considered as charities at all. I totally agree that the top rate relief should go to genuine charities and not the donor.
It is interesting how all the well off’s little ways of avoiding tax are now coming into the open. My biggest bugbear is how I frequently get asked if I want a receipt for something that is clearly not a business expense – which all suggests that there are rather a lot of people who are claiming back VAT and tax deductions that they are not entitled to. And meanwhile all those on PAYE have little alternative but to pay their income tax and earned income surcharge (or national insurance as it more commonly called).
Stephen.. I’d venture that you’re frequently asked if you’d like a receipt because receipts are no longer provided as a matter of course (being, very often, nothing but a waste of paper and ink). We now, very often, get the choice. I wouldn’t read too much into it.
No – it is quite common to be asked if I want a VAT receipt.
stephen – I am interested as to what you think can’t be a business expense. With the exception of illegal activities, almost everything must be a business expense.
Taking your kids to dinner on a Sunday lunchtime was the last time I was asked. I am aware of “friends” who have furnished their whole house and put it through on their businesses, and they make no secret of it.
I have no interest in reclaiming VAT. Nonetheless, I always ask for a receipt. Why? Beacause, although there is no guarantee, it will make it a little bit more difficult for the business concerned to avoid paying taxes, and not just VAT. Of course this will sometimes result in ” … then I will have to add VAT …”. Not to accept would be tax evasion. But this is not to say that it doesn’t happen. You see it is not just the rich that partake in tax evasion. From a slightly different angle, in the case of the recent closing of the Channel Island VAT “loophole”, it is the purchaser who is avoiding the VAT. The companies who use the this loophole “may be” doing nothing more than using this (hitherto) legitimate tactic to increase their sales. On a more personal note, I recently chose to make a purchase from a company, claiming to be operating in the UK. In the event, it turned out that the company operated from mainland Europe. In cases such as this, the VAT “loophole” has not been closed, thus allowing this, albeit minor, tax evasion to continue.
So nobody is willing to entertain the idea that the charities already get the benefit of the relief because the individuals give extra in the first place, knowing that there is some tax relief to come in the future?
I realise that some will baulk at the notion of anyone in the top 1% doing anything that’s not motivated by greed and self-interest, but it’s probably worth remembering that regardless of the tax relief, at the end of this transaction the donor has less money, and the charity has more. The relief simply operates the way it does as it’s the most efficient way of enabling us to donate from pre-tax earnings.
I’m all for reforming the rules about what is and isn’t a charity to crack down on abuse.. but messing about with the tax relief seems to be an entire waste of time. The people giving the large gifts that seem to be causing all this angst are, I’m sure, clued up enough to know what the charity will get, and what the true cost to them will be. If the rules are changed then they will simply adjust their behaviour to prioritise whichever of those two sides of the gift is the most important (and whichever side they choose, the charity itself probably won’t ever end up better off).
There’s an awful lot wrong in the charity world, serving mainly the interests of those inside the charity ‘industry’.. who are far removed from the people who really want to raise and spend money on things they believe in. The tax angle could have led us into having that debate, but it’s just turning into another ‘bash the wealthy’ thing. Another opportunity missed, I feel.
There is little evidence at all that the wealthy do give more for that reason – all the evidence is that they give less as a proportion of income
Assuming that is true and fair (I don’t dispute it, but it isn’t something I’ve read up on), that people seem to get less altruistic as they get wealthier (or get wealthier because they are less altruistic) isn’t especially relevant.. it’s how do we ensure that charities get the most out of what those people are willing to give.
But they’re not getting the benefit of the tax
and neither should they – see my previous point to Mark Astarita
@ RM, 2.05pm
“There is little evidence at all that the wealthy do give more for that reason”
(that reason being, to obtain tax relief).
But hasn’t the whole storm that has recently been whipped up about tax relief on charitable giving been driven by the belief that the wealthy are using it to reduce their tax bills? And I think most rich people know damn well they are going to get higher rate relief in the same way that they know they’re going to get relief for pension contributions.
The government grants tax relief because it sees certain things as good, for example savings (ISA), providing for one’s retirement (pension), giving to charity (Gift Aid), investing in start-ups (EIS, VCT etc)
“all the higher rate relief goes to the donor.”
This is one of those very simplistic claims which is very easy for you to put in front of what you reckon to be the uneducated masses who think a tax repayment to the donor is different from the charity being able to reclaim basic rate tax. They are not different in that the object is the same: to grant tax relief at the donor’s marginal rate. But virtually no one outside the tax world understands the mechanics of how tax relief is given on charitable donations so a cash repayment to the donor just looks like a freebie for the donor. But it’s no more a freebie than the donor who gets relief at the basic rate.
Respectfully – that’s dissembling of the highest order
Please see my reply to Mark Astarita above for a just and effective system for dealing with the charity tax issues.
I have noted what you said
I do not agree with it
I can’t really see how the lack of tax relief to the donor discourages charitable giving. Surely you give to charity because you agree with that charities aims / have sympathy with whatever cause. I am sure true philanthropists don’t worry about receiving tax relief.
Richards suggestion seems emminently sensible.
A worked example….
I send a charity a cheque for £75. This is paid from income which has been taxed at 40% – so I had to earn £125 to get that £75. HMRC say that I should be able to donate to charity from my income before they take any tax. Under the current system they allow the charity to claim back the basic rate tax on my £125, and I claim back the higher rate bit.
So, The charity gets £75 from me, and £25 from HMRC.. and is £100 up on the deal.
I give the charity £75, but get back £25 of the tax I paid.. so on a post tax basis I have spent £50 (but, remember, that tax relief that the charity and I shared was from tax that I paid in the first place).
HMRC is, alas, down £50… albeit that, under the rules, it’s simply never been entitled to that £50.
So what happens if we remove the higher rate tax relief?
Well if I still send a cheque for £75 then the charity still gets £75 from me, and £25 from HMRC — so it’s no worse off. I, however, don’t get £25 back from HMRC, so I am worse off by £25 and HMRC is better off by £25. If we’re only interested in ensuring that the charity benefits from tax relief, then this is all fine.
However… in this second example, my donation has cost me £25 more. So if you change the rules then I have to, in effect, increase my donation so that the charity gets the same amount. If I’m happy to do that, the we’re good. But what if I’m not? What if I only ever had £50 to donate, but I factored the tax relief I’d get into my calculation so that I could send a £75 cheque? In this scenario, when you change the rules I’m going to send a cheque for £50, not £75.. and after reclaiming the gift aid, the charity is only going to get £67.
Most people, I think, decide what to donate to a charity based on what it costs them.. not what the charity gets. If you take away the higher rate relief, then donations which are the same in the eyes of the donor, will mean less money going to the charity.
So it’s not that a removal of relief would/should discourage giving, it’s that it would (it can be argued) reduce it. If the overall amount of money given to charities is imited by the amount that donors are willing to give then if HMRC are to take a slice it can only follow that the charities will get less.
Richard’s suggestion is that the relief should go to the charity not the donor is fine, but that can only make the charities better off if donors are happy to donate more (in terms of cash from their pockets) and, of course, they can only be worse off if donors decide to donate less. In the end, it’s likely that we’ll end up roughly where we are now, but with a much more complicated process to facilitate it all.
And here’s a quirk (and I invite anyone to check the maths.. but I think it’s right)..
If, as a result of my not getting tax relief, I have to change my donation to £50, and the system is set up so that the charity will get all the tax relief, then it will STILL be worse off, because instead of grossing up my £75 donation, it’s only grossing up my £50 donation.. meaning that the total tax relief (higher and basic rate) is £33, whereas previously it was £50.
Except that all the evidence is that no one thinks that way
People decide what to give and no not alter it for tax relief, higher rate or not
You assume rational beings – and psychology shows we aren’t at all – and like you can’t do the maths either
So your claim is spurious
Are you saying my maths is wrong somewhere? If so, where? You’re quite possibly right.. but help me out a little!
As for assuming rational beings… I get that entirely.. but we have to remember that the people being ‘targetted’ here are higher taxpayers who currently claim the relief. I’d expect more of them to act ‘rationally’ in this area than we’d expect for the overall population… and the more they give to charity, the more we can expect they will be well aware of the implications and real costs/benefits of what they do. Once you get to the *really* wealthy ones, who have accountants advise them, you can be 100% sure that they will decide on their donations when in full posession of the facts and implications.
You or I wouldn’t bother thinking about the tax implications of donating £10 to something… but probably would if it were £10,000.
If this fuss is really about very rich people with finely planned affairs to minimise the tax they pay, then don’t you think it’s far more likley that they will think and act rationally than not?
There is no evidence such people are nay more rational than anyone else
Indeed, there’s quote a lot to suggest the reverse
They’re also proportionately meaner
It seems to me that youre asking us to believe that the people who, normally, you would accuse of cynically planning their financial affairs and jumping through all the little loopholes to minimise their tax.. for, predominantly, their own personal gain.. will not adjust their behaviour if this particular tax rule is changed. That’s a curious stance.
Surely it’s better to accept that behaviours will change, and decide what (if anything) should be done to counteract a reduction in charitable giving.
I don’t deny for a moment there are people who do such calculations
I just don’t think they are anything but a small minority – so the impact on giving will actually be quite small