Charity tax reliefs offered to UK charities 'urgently need an overhaul', according to a new report from the Charity Tax Commission.

The Charity Tax Commission is an independent group led by the former chairman of the Inland Revenue (HMRC), Sir Nicholas Montagu. It was commissioned by the National Council for Voluntary Organisations (NCVO), to review the tax reliefs of charities in 2017.

A report, Reforming charity taxation: towards a stronger civil society, published by the commission today, revealed a number of proposals that would drastically overhaul the existing tax relief system for charities.

Its proposals include changes to the rules surrounding Gift Aid and other reforms that could incentivise giving and offer financial protection to UK charities.

The report proposed to enable higher rate tax payers to pass their tax relief onto their chosen charities more easily, which could help to raise over £250m for charities every year.

It says that while top earners can use their self-assessment forms to claim back the additional income tax they have paid on money they give, many choose not to, while others opt not to pass it on to their chosen cause.

The report also proposes a central database like the NHS Organ Donor Card, which would enable people to complete a single, enduring universal declaration covering all their subsequent gifts to charities. This, it claims, would mean fewer forms and would make giving simpler for everybody.

Commenting on the report, Sir Montagu said: “It’s been 20 years since charity tax reliefs were last reviewed, and many of the rules were written for an analogue era. With people giving by text message and contactless payment, and with many donors themselves increasingly mobile, we need a system fit for the digital age if we are not to see the UK’s natural generosity held back.

“The Charity Tax Commission’s recommendations could help bring the tax treatment for charitable giving into the 21st Century and result in a huge increase in the amount of money available for good causes.

“Yet none of these proposals should involve significant extra public spending or lost revenue. It’s the right time to get on with this.”

He said charitable tax breaks are currently worth a total of around £5bn a year, but “clunky” systems could mean people’s generosity and the work of charities is “being stifled when it should be nurtured.”

“Quite rightly, the money we give to charities has been treated as being essentially tax-free since the first Income Tax Act, in 1842. Yet the current system of Gift Aid sees hundreds of millions being lost every year. That has to change,” he said.

The new report sets out a number of recommendations which the Commission wants the government to consider, including:

• Make offering ‘Payroll Giving’ schemes mandatory – this option for working people, also known as Workplace Giving or Give As You Earn (GAYE), enables them to donate out of their pre-tax income.

• Remove VAT from wills that include a charitable donation – this would give solicitors a greater incentive to raise the question of whether someone wants to leave a gift to a charity in their will.

• Consult on extending business rates relief to wholly-owned trading subsidiaries – charities get 80 per cent relief on non-domestic business rates, which can be topped up by up to a further 20 per cent by local authorities. However, charities can lose this benefit if they set up trading subsidiaries in order to comply with rules on charity trading.

• Build public trust by improving openness – it recommends charities with annual revenue of over £1m should publish detailed information in their annual reports about the money they receive from tax reliefs.

Longer-term proposals:

• Comprehensively reviewing VAT for charities – designed to address systemic anomalies, improve efficiency and increase charitable activity.

• Reconsider business rates relief – it claims this benefits certain charities disproportionately and may not reflect the increasingly digital world in which charities operate. A review could consider the equity of distribution and the public benefit existing relief delivers.

• More research into Gift Aid – the Commission thinks its distribution tends to favour certain types of charities working in certain areas and working on certain topics. Additional understanding could facilitate reform, such as different ways of distributing Gift Aid.

“The Commission set out to ask whether the tax system could be better employed not just to help protect existing giving but also to encourage a new wave of philanthropy. The answer is a clear ‘yes’," Sir Montagu said.

“Although we all give in different ways, few of us like fiddly forms and none of us want to see too much being spent on unnecessary admin. Sensible reforms are overdue.

“I’m grateful to my fellow commissioners and to NCVO for their support in getting this far. Now it’s up to the government to grasp the nettle and make sure the generosity of our fellow citizens is matched with a charity taxation system that is fit for purpose.”

The Commission’s final report can be found here. It includes UK-wide data about who claims Gift Aid and receive business rate relief, with comparisons by size and sector of different charities.

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