'Charitable income will suffer from the Budget, as the Treasury knows'
Question 1. Who said this: “Too many people think that all we care about is balancing the books. Wrong. We are going to encourage a stronger culture of giving in Britain — with more people giving more money and more time to good causes around us.”
It was the Prime Minister, of course: David Cameron generously donating his time to the cause of explaining his Big Society idea, on May 23, 2011.
There is already a scheme to encourage giving. It is called Gift Aid. It categorises donations to good causes as net contributions after basic rate tax. If you donate £100 cash that counts as 80 per cent of the real amount, and the charity can claim the missing £25 from HM Revenue & Customs. If you pay income tax at the higher rates you can even reclaim something. On £100 that would be £25 for a 40 per cent payer and £37.50 for a 50 per cent payer. There are equivalent provisions for companies and corporation tax.
Naturally there is a limit. An individual can only use Gift Aid if they have paid tax at least equal to the amount claimed by their charities. That is only fair. But the HM Revenue & Customs website does have several pages devoted to “Tax-efficient giving to charity”. So the taxman cannot claim that, to his surprise, people are using tax relief for charitable donations to reduce liabilities.
With that background, and with the Prime Minister’s clarity and directness, we could expect that his government wanted people to give even more money to charity.
Question 2. Which government, in its Budget on March 21, 2012, announced plans to limit the amount which individuals can donate to charity? That’s right. Her Majesty’s Government, speaking through Chancellor of the Exchequer George Osborne. The government’s right hand does not seem to know what its head is thinking.
In defence of the Chancellor, he did not actually propose limiting donations as such. He wants to curb all forms of tax relief that are currently uncapped. That wider group includes measures to encourage, for example, business investment (completely unnecessary, of course, in today’s booming economy). Reliefs such as pension contributions are untouched. The Treasury has noticed that “reliefs can be used without limit to reduce tax liabilities, so that some taxpayers with very high incomes have very low tax rates” (Budget 2012) — quite true, because that is what they are supposed to do. Anyone seeking to claim more than £50,000 will be limited to relief at 25 per cent of their income. “This will increase effective tax rates and help ensure that those with the highest incomes pay a fairer share.”
It’s all about balancing the books, after all. Perhaps also, balancing perceptions of a government which lowered income tax for high-earners. The net effect is a minimum income tax (of 20 per cent, if the top rate is 45 per cent), a pet project of Warren Buffet. It would have been nice for a government committed to transparency to have been a bit more open about that.
On a putative £100 donation, a donor will not be certain how much relief he can claim until he knows (a) the amount he will want to claim on all reliefs; and (b) his income for the entire tax year. So he does not really know how much he can afford to give. Charitable donations are directly competing with other demands, such as business investment. Perhaps they always were, but relief on one form of expenditure will no longer cross-subsidise another.
Consider some numbers. HM Revenue & Customs estimates the cost of exemption from tax on charities’ investment income, and the Gift Aid relief that both they and donors receive, at £1,550 million for 2011-12. That dwarfs the cost of the principal investment reliefs, the other main target of Osborne’s proposal, which come to £410 million. The Treasury estimates that, long-term, its relief-capping plan will raise about £300 million per annum. It is reasonable to assume, from the HMRC costings, that around £250 million of this will be borne by the charitable sector.
Of course the Treasury should reconsider all tax reliefs. But it has already done so. The Office of Tax Simplification published its Review of Tax Reliefs on March 3, 2011, which investigated the reliefs for donating investments and trading stock, and the zero-rating of VAT on sales by charities. The annual cost of these, according to the HMRC, is £250 million. The report concluded that the policy rationale remained valid and that they provided “significant benefits”.
So, reliefs which cost £250 million are worthwhile, cost-effective and provide significant benefit, while £250 million has to be raised from charities by reducing the use of other reliefs. But that merely prices the relief involved. If the Treasury is losing £100 from a 40 per cent taxpayer, that equates to a donation of £250. Potentially, then, there could be a fall of £625 million in charitable donations every year. That is a larger sum than the Big Society Capital Fund which the Prime Minister launched on April 4 to provide “organisations tackling major social issues access to new sources of finance to help them thrive and grow”.
Ah, you might say, but that does not mean charities will actually lose any cash. An optimist has to assume donors are willing to donate the same gross amount irrespective of any tax relief. Really?
When Alistair Darling increased his proposed additional income tax rate from 45 per cent to 50 per cent, the Treasury thought it would raise £1,140 million. Today, the Treasury believes that reversing this change will cost only £100 million. The original estimate was wrong by 1,040 per cent. As the official assessment explains, “The underlying behavioural response was greater than estimated previously.” Nobody would seriously claim the same behaviour, such as emigration, will follow capping of charitable donations. However, the Treasury’s own evidence indicates that in the current climate taxpayers are highly responsive to any increase in net liability. It knows perfectly well charitable income will suffer. “The government will explore with philanthropists ways to ensure that this measure will not impact significantly on charities that depend on large donations.” (Budget 2012.)
Osborne explained the reduction in tax rate thus: “No Chancellor can justify a tax rate that damages our economy and raises next to nothing — it is as simple as that.” If £100 million of revenue from high earners is “next to nothing”, how does he rate charities losing up to £625 million a year?
Question 3. How long before the government drops this daft idea? Cameron is already saying that he will “listen” to critics. But will he make cosmetic concessions, or (as we hope) abandon it altogether?
Full disclosure: Standpoint clearly has a dog in this fight. We are owned by a charitable body, the Social Affairs Unit, of which I am the Director, and we depend on the generosity of a small number of public-spirited individuals and organisations.