Recent figures revealed charities are losing a huge amount of income due to unclaimed Gift Aid – but with a number of changes having been made to the tax system, what role does Gift Aid play now?
Over 150 years ago, William Gladstone as the Chancellor of the Exchequer tried to reduce tax relief available to charities and donors saying that “in every case, exemption means a relief to A at the charge of B”. This truism did not lead to a change and Gladstone’s proposals were rejected. More recently in 2012, George Osborne as Chancellor tried to cap the amount of relief available to donors. Once again, this was rejected.
In 2013, the National Audit Office (NAO) prepared the report Gift Aid and reliefs on donations. When launching the report, Amyas Morse, the Comptroller General and head of the NAO said: “Gift Aid is an important source of income for many charities, worth £1 billion to charities in 2012-13. The changes made in 2000 to increase charitable giving resulted in a further £940 million of reliefs going to individuals and companies as an incentive to give more money to charity. However, the exchequer departments cannot demonstrate that these incentives are working, or that the increased cost to the taxpayer has resulted in a rise in donations to charity.”
The UK and Gift Aid
UK’s Gift Aid tax relief is unique when compared to the way in which other countries provide tax relief to donors. The key difference is that much of the relief goes directly to the charity. Charities can claim from HMRC an extra 25p for every £1 given by eligible UK taxpayers. Thus, a basic-rate taxpayer knows that her/his £1 donation is worth £1.25 to the charity. Taxpayers who pay above the basic tax rate can claim back through their tax return the difference between the tax rate they pay and basic-rate on the value of their donation.
Higher rate and additional rate relief is given by increasing the basic rate band and higher rate band by the grossed-up amount of the gifts. In most cases, if a donor is paying tax at the higher or additional rates (40% or 45%), the relief will be equal to the difference between basic rate and either 40% or 45%. So on a £100 donation, the higher rate tax payer can claim back £25 (£125 at 20%) and an additional rate tax payer can claim back £31.25 (£125 at 20% plus £125 at 5%).
Changes to the system
Tax reforms in 2010 introduced, for a few years, a higher tax bracket of 50% for incomes above £150,000 and removed the tax-free personal allowance for those earning above £100,000, which had an unintentionally large impact of creating a marginal rate of 60% for tax payers in the £100,000-£112,950 income band. Both changes further reduced the cost of giving for taxpayers with incomes in these ranges. However, as the NAO report explained, the impact of tax reliefs has been unknown.
Earlier this year, the NAO – University of Birmingham Tax Centre was set up to identify and conduct research on tax issues and to encourage debate, stimulate ideas and exchange knowledge through events and networks. It also aims to enable government bodies, academics and tax practitioners to discuss needs and practical challenges in a ‘safe place’.
The Tax Centre’s researchers reviewed over 75 million self-assessment income tax returns for periods before and after the 2010 change and concluded that the amount of giving responds positively to a change in the cost of giving. However, every additional £1 spent on tax incentives is generating only £0.27 more in donations. This increases to 35p for higher-rate self-assessment taxpayers. In other words, charities would get substantially higher donations if the value of the Gift Aid relief were given directly to them.
This idea has been discussed periodically but some are averse to change and think it will lead to less giving – I believe that it will lead to more income to charity.
A review of tax relief
This and other matters will be considered in the first systematic review of charity tax reliefs in over 20 years, which is being carried out by the Charity Tax Commission, which was established in October 2017 to undertake a full review of the impact of the tax system on charities. In the 20 years since the government’s last comprehensive review of charity taxation, the voluntary sector has evolved dramatically, with systemic and fundamental changes to the way charities operate, the role they play in society and service delivery, and their use of technology. A thorough appraisal of how the UK’s fiscal framework functions for charities could help position the long-term strategic role of charities in society.
The commission is being chaired by Sir Nicholas Montagu, a former chair of the Inland Revenue, who is joined by a board of six commissioners with charity, economic and fiscal expertise. NCVO is providing secretariat support for the commission. The commission will develop a long-term strategic approach to fiscal policy for the voluntary sector. In doing this it will examine the principles that underpin charitable tax relief, analyse the current system of tax reliefs, and develop recommendations for reform.
The commission will primarily focus on increasing the efficiency and effectiveness of the existing taxation system and make practical, evidence-based recommendations for government.
The commission has opened its call for evidence. This 16-week consultation period will be an opportunity to provide feedback on their experience and views of the current system. The consultation will close on Friday 6 July 2018.
Anyone with relevant knowledge, expertise or experience of charitable tax reliefs in the UK is invited to submit their evidence. This would include charities, donors, academics, think tanks, representative bodies, accountants, philanthropy and financial advisers and tax professionals.
This is an important consultation, which could impact far into the future and it is vital that relevant stakeholders engage.
Pesh Framjee is global head of non-profits at Crowe Clark Whitehill