A question for the Coalition: Would Lib Dems and Tories support the Charity Tax if Labour had proposed it?

One of the aspects of the furore over the Coalition’s Charity Tax that has struck me is that charity is a more divisive issue than I’d realised.

Those of us who work in the charity sector probably take for granted that our organisations provide a public good, that the aggregated generosity of donors and the endeavours of staff make for a better society. That’s probably a majority view among the wider public, but it clearly isn’t a universal attitude.

Look at the reader comments on major news websites — for example, the BBC here or the Telegraph here — and you will find plenty of people who have serious issues with charities. Criticisms range from them being rich people’s hobbies to their alleged wastefulness to the suggestion that charitable tax-relief prioritises donkey sanctuaries over the NHS.

So here’s my quick three-point defence of the principle of charities, the work they do, and why society (and therefore the Government) should want to encourage them to thrive:

1) Charities serve the public benefit.

Will the public always cheer on every charity equally? No, of course not — for some, the idea that public schools or animal sanctuaries are charitable enterprises is anathema. But then I don’t cheer on all aspects of public spending equally either, preferring public spending on education (say) to the renewal of Trident.

The fact remains: the public overwhelmingly benefits from charitable activities, and indeed it is their very diversity which is the reason for their success. Because there is a charity which suits everyone’s tastes, and serves all our individual senses of how society can be bettered, more money and volunteers are collectively levered into the charitable sector than could ever be achieved by state provision alone, or by charities defined solely by what we personally might consider to be worthy causes.

2. Charities are our ‘small platoons’

One of the more disturbing critiques I’ve seen in recent days is that charities are somehow undemocratic, that any tax-relief offered to donors is money which should instead have been handed to the state to spend. This claim has come from some surprising quarters — for example, arch-Tory Andrew Neil tweeted:

Let’s get some proportion here. In 2012, central and local government will spend some £712 billion, the charitable sector some £11 billion: state spending dominates. I’ve always been attracted as a centrist liberal to the Burkean ideal of ‘small platoons’ able to take on (and adapt, innovate and improve) the functions of government. We need a mixed market, a plurality of providers, and the charitable sector is well-placed to fulfil that role.

3. Charity-giving should be encouraged for all donors.

There has been some cognitive dissonance at play in the last couple of weeks. On the one hand politicians ask the wealthy to dig deeper into their pockets. And then on the other hand they bemoans the wealthy who do so for allegedly skewing priorities and so-called tax-dodging.

A tangential argument has been that the wealthy are somehow getting preferential treatment in their charitable giving, that tax-relief on donations favours the rich. This isn’t the case. Until the Coalition decreed otherwise in the budget, the guiding principle (as Nick Aldridge puts it on his blog) underpinning charitable tax-relief has always been that:

people shouldn’t be taxed on income they’ve forgone by giving it away for the public benefit.

Thus basic-rate taxpayers and higher-rate taxpayers have been treated equally: neither group of citizens has been taxed on the money they choose to give away to good causes. Rather remarkably, it is now a Liberal Democrat and Conservative coalition government which has chosen to end that sound principle.

To add insult to injury the Coalition has done so under the pretext of clamping down on tax-dodging, despite the fact that the Treasury has yet to be able to produce a single credible example of how the wealthy can legally get rich by giving their money away. For once Ed Miliband has it right:

Only this government could be so out of touch as to cut taxes for the richest people in our society but at the same time single out those who are trying to do the right thing for a tax rise.

And deep down, Lib Dems and Tories alike must know that, if they had been in opposition and this proposal had been put forward by Labour ministers, they would right now be taking to the airwaves to lambast a decision that will leave the wealthiest just as wealthy and charities and those they serve that much poorer.

To show your support for the ‘Give it back George’ campaign for the Government to drop the charity tax, please visit this site and sign the petition.

Full disclosure: I’m a full-time fundraiser who’s been working for educational charities since 1998.

* Stephen was Editor (and Co-Editor) of Liberal Democrat Voice from 2007 to 2015, and writes at The Collected Stephen Tall.

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23 Comments

  • A cap on tax reliefs is long overdue and I think many people are capable of judging it on its merits and demerits, not on the basis of who proposed it.

  • Isn’t this part of Nick Clegg’s tycoon tax?

    I’m not bashing Nick here, clearly the ‘quad’ came to this decision collectively, but it does show that they are not being properly informed about consequences by their civil servants, or they are ignoring their advice.

    Either possibility is quite worrying. Especially combined with the fact that this proposal quite clearly was not discussed outside the inner circle. I’m surprised Clegg wasn’t taken to account for announcing the tycoon tax at conference, it might have spared you this disaster if he had been.

    Something seems terribly dysfunctional.

  • Andrew Tennant 13th Apr '12 - 8:44am

    Opinions can often be formed on the basis of self interest. Here’s how I see it:

    – If we accept that there is a level of justified, nay required public spending (and I do)
    – And from that agree that taxes are levied at a level so as to generate the funds needed to pay for it
    – Then any action, taken by the rich, meaning that they pay less tax, means higher taxes need be levied on the not rich to recoup the lost revenue
    – It logically follows then that, if the rich give money away to charity, I pay more tax
    – It’s not their money, but the money of other taxpayers that they are donating
    – I ask myself, am I happy for the rich to put their hand in my pocket, to take my cash to give to their pet projects and favourite causes
    – The only logical conclusion is that I am not, as if I had wished to give to these causes I could do so myself

    The coalition is rich to end this transfer from the poorer to the wealthy – if there are funds not needed for public services then let us lower the taxes of the poorest and then let the many, not the few decide what to do with it!

  • Andrew Tennant 13th Apr '12 - 8:50am

    #damnyouautocorrect!

    The coalition is *right* to end this transfer from the poorer to the wealthy – if there are funds not needed for public services then let us lower the taxes of the poorest and then let the many, not the few decide what to do with it!

  • @Andrew: Two flaws in the logic. First “It’s not their money, but the money of other taxpayers that they are donating”. Yes, a donation on the scale considered will reduce the amount in the tax pool, but unless the donor is being taxed at a marginal rate of 100% – which I find difficult to believe, the LDs themselves have been complaining about marginal rates for the rich of below 15% recently – the total money being put towards the common good is greater. Second “Then any action, taken by the rich, meaning that they pay less tax, means higher taxes need be levied on the not rich to recoup the lost revenue” – assumes that the work of government and the charitable sector is orthogonal. In reality charities get a lot of grant support from government, local and national, and large donations make charities more sustainable and ease the pressure on the public purse. Idealists may hope that charities never need to do the work of government but the fact is they do, and without a mainstream party prepared to tax us to pay for a worthy level of public service that state of affairs will continue.

  • Nikki Thomson 13th Apr '12 - 10:17am

    I too have worked in the charity sector and indeed am currently chair of a small Edinburgh-based charity. I think a lot of charities do very good work and that this should be applauded, supported and the public encouraged to provide for financially.

    However, I think there is a world of difference between a wealthy philanthropist who gives significant sums of money to the local donkey sanctuary and claims tax relief on that, and the wealthy socialite who claims tax relief on their £1000-a-pair charity ball tickets.

    Truly charitable giving isn’t about what kick-back you can personally get from it. It’s about giving what you can afford to give, to a worthy organisation or cause of your choice, because you want to make a difference to that organisation or cause. If there is a personal motivation or gain to be had from from the transaction, it ain’t charity.

  • I agree with Nicki (wait, that phrase sounds familiar from somewhere?)

  • Nikki,

    This is not about ‘kick backs’ it is about enruing that charitable giving is efficient. To understand look at Nick Aldridge’s geart blog referenced above and Rhodri Davies work here: http://giving-thought.tumblr.com/ and especially this one http://giving-thought.tumblr.com/post/20110289856/to-cap-it-all-some-further-thoughts-on-the-new-budget

    (DOI I now work for the Charities Aid Foundation)

  • Andrew Tennant 13th Apr '12 - 12:26pm

    @Julia
    I’ve no objection to individuals donating their own money net of tax and having no impact on the tax revenues raised – that’s what’s being proposed rather than the status quo.

    As for the overlap between state spending and that received as the tax proportion of donations – I prefer democratic and oversight for the spending of public money over the arbitrary and unilateral decisions of rich people – I feel proud not ashamed of that.

  • Good use of the phrase “cognitive dissonance” Stephen – genuinely.

  • Stephen,

    I think the answer to your question is – No.

    As Rhodri Davies concludes “The long and the short of all this is that the proposal to cap tax reliefs is definitely bad news for the voluntary sector. It will not just affect a few major donors and a few large charities; it will affect many donors who do not consider themselves especially wealthy, charities large and small, and trusts and foundations across the country. ”

    Our 2010 manifesto proposed reforming gift aid to operate at a single rate of 23%, ,b>giving more money to charity while closing down a loophole for higher rate taxpayers.

    I think the idea of a single rate for charitable contrbutions, for both basic and higher rate taxpayers is a good principle. The rate however needs to be set at a level that will see no dimunition in the grossed up value of donations to the charity sector. I would suggest that this should be 32% (the combined basic rate of tax and NI). By setting a high enough single rate, there is no reason for capping charitable contributions – assuming the objective is giving more money to charity while closing loopholes , and not a net transfer of funds from the charity sector to the exchequer.

  • But we live in a more crowded, a more fast moving world, a more interdependent world than in Burke’s time. We have also long since taken on the mantle of most democratic party. We cannot keep shrugging off the need to take democratic decisions about the allocation of resources. By devolving too much to the “small platoons”, in the end the will of the people has no power, no mechanism to translate into action. Do we wish to sacrifice everything on the altar of individual freedom? Our constitution makes it clear we have other objectives to balance with individual freedom – either we do this, or the principles of the architects of the 1988 merger and the will of the predecessor parties is being sabotaged.

  • Of course the answer is Yes Stephen, that’s how our adversarial political system works, but then ask yourself

    Would Lib Dems and Tories support the reorganisation of the NHS, the cuts, the AV referendum, immigration restrictions, the granny tax, increasing airport capacity in the south east, elected police commissioners,
    capping child benefit, Personal Independence Payments, Free Schools, raising VAT, ending EMA or getting a cat for No !0 if Labour had supported them.

    The politics of Government and Opposition tends to supersede everything else in this country and its very hard not to come to the conclusion that some policies are just government policies rather than belonging to any political party.

    The question cannot then only be ‘would we support x if we were not the government’ it has to be ‘should the government do x’ and with this the answer is ‘yes we should cap tax relief and the super rich can go and lump it’

  • Nicki – Charity Ball tickets are NOT eligible for tax relief: http://www.hmrc.gov.uk/charities/guidance-notes/chapter3/sectionf.htm#ce (3.52.6)

    I don’t think that the proposal will raise any money. Few people donate more than 25% of their income over their lifetime. So those who want to donate a lot just have to be careful to do it in years in which their income is high, and they can do it within the limits. Then they get the full tax break – as now. They can donate it to their own charitable trust, and then donate it to “real” charities as and when they wish. It is a big of a hassle, but it would be very lucrative so people will do it.

    Equally someone who saves up and wants to give £1m to a charity when their income is less than £4m will be told by their accountant that this is tax inefficient. They will then put it in an escrow account, tell the charity, and release it to the charity each year at a rate of 25% of their income, ensuring that they get all the tax benefits.

    In neither case will tax receipts rise.

    So we have created a tax law that annoys a lot of people, is easy to avoid, raises no money, but creates jobs for tax lawyers and accountants. As they say on twitter: #fail.

    You can say that giving is out of pre-tax income, as now. Or out of post tax income. Or you can limit the relief so that the charity can claim something and individuals cannot. These would all work and we can argue which is the best approach. But the budget proposal will not work.

  • The issue of charitable donation can be sorted out in the tax rules and Danny Alexander has already said there will be consultations about that.. What bugs me is that there is a risk that this this obvious ploy by the very wealthy to stop the clampdown on tax minimisation will become the trojan horse that stops the clampdown altogether.

    Just one more question. If people give money to charity don’t they do it because they want to? Surely they don’t just do it to cut their tax bill? It’s a very expensive way of avoiding tax because they most they would have paid was 50% tax (now 45%) and they are losing 100% of whatever they give to charity.

  • I think many people are missing the issue of what is happening.

    Firstly, as a taxpayer, my gross income is MY income. Because I live in the UK, I as a good citizen pay my fair share of taxes out of MY income.

    Secondly it has been the guiding principle that “people shouldn’t be taxed on income they’ve forgone by giving it away for the public benefit.”, therefore if I decide to give some of MY income to charity then the government has no right to the tax that they would of gained otherwise from that part of MY income.

    However, because of the way the tax system in relation to charitable giving has worked over the last 10+ years, when I give a net contribution to a charity, that charity is only able to reclaim basic rate tax and not any higher rate tax I may have paid (I seem to remember it being different in the 80’s and early 90’s, but have destroyed my records from then). HMRC instead permitted me (prior to April 2012) to reclaim the difference between the two tax rates, and put this money back into my pocket as a reward for my philanthropy. Now (post-April 2012) HMRC wishes to keep these monies, but still wants (and actually needs) me to continue my philanthropy…

    So we can see that (prior to April 2012), if I had sufficient income, I could contribute to charity and live on the HMRC rebate.

    Interestingly, regardless of the above, if any of my contribution to charity is made out of earned income, the Treasury still receives tax in the form of non-refundable National Insurance contributions, so they are already breeching the guiding principle underpinning charitable tax-relief…

    So in conclusion the government has just shot themselves in the foot by doing away with a mechanism that rewarded philanthropy, at exactly the time they want more people to engage in philanthropic behaviour.

  • If Andrew Neil has a point, then ALL tax relief on charitable giving distorts the government’s tax collecting.

    However, suspect a BBC report on this is being worked on given this tweet:
    09:08 UK time, Monday, 16 April 2012
    @bbcnickrobinson via Twitter
    Has anyone made case that better for rich to pay tax for NHS etc than to make tax free donations to charities – opera etc? Blog coming soon

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