It’s time to reform charity tax relief

Posted on

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?