It is as if George Osborne has got a political death wish. First, there was the botched pensioners’ tax announcement. Then, there was the hilarious pasty tax. Now, the charitable donations tax ememption limit idea is attracting great opprobrium.
But hang on a minute.
There is something in that tax exemption threshold idea.
It is quite wrong that tax exemption is given for donations to “charities” beyond the remit of the Charities Commission. There is rather vague talk of unspecified East European “charities” being used. But, in any case, I think most people would be surprised to learn that donations to foreign charities can be deducted against tax. That’s a loophole that certainly needs to be closed down pronto.
Apart from that, it is a perfectly valid judgement for the government to decide that it wants more money to go into the Treasury and less to go to charities. It may be rather disharmonious with the “Big Society” charade, but it is quite valid, particularly in these straitened times, for the government to curb the amount of charitable donations that any one person can claim against tax. I understand that there are only a very small number of multi-millionaires involved, some of whom pay tax well below 20% of their income or, in some cases, 0%.
One philanthropist told Radio Four’s Today, in terms, that the government is not very good at spending money, so therefore giving to charities instead is justified. Come off it. I have seen the internal workings of some charities at close quarters. It really is preposterous to say that the government is any worse or better at spending money than charities.
The government is quite within its rights to make a call on the amount it wants to go to hospitals, schools, police etc as opposed to the amount going to charities via GiftAid.
Please spare us the protestations of the rich with their expensive PR representatives! And how much of our donations are charities spending on fighting the government on this one?
Frankly, if rich philanthropists don’t like the idea of a UK charitable exemptions limit, they know what they can do.
I would note, in passing, that we are, according to the minister who explained the situation very well on Today this morning, talking about £50-100 million per annum here. That’s the governmental equivalent of a gnat’s small toe.
* Paul Walter is a Liberal Democrat activist and member of the Liberal Democrat Voice team. He blogs at Liberal Burblings.
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18 Comments
‘I would note …’ (final para)
Good piece Paul.
One thing I am still unclear about and no one has yet been able to explain (I’m sure someone here can help!). If a philanthropist gives £1million to a charity instead of the tax man, are they any better off in terms of net income? They have obviously reduced they amount they pay in tax by £1m, but does this actually leave them better off?
@Richard Morris
The way I understood it was that, some people plough money into their pensions, thus bringing their tax liabilities down, another way of avoiding tax is to register as a company, have your wages paid to “your” company, purchase vehicles, property, travelling, clothing etc etc as a company expense thus avoiding tax and pay yourself a “lower wage” avoiding the 40 and 45% tax bands
as well, some people, may make a contribution to charity in order to bring their income in under the 45% tax bracket for example.
The whole system stinks and it’s about time it was reformed.
The rich need to pay their share to society from which they earn their wealth, If they wish to contribute more towards charitable purposes then that should be a matter of choice and not tax deductible.
Thanks Sid!
Wasn’t “Atlantic Bridge” a charity – in the Fox/Werrity scandal? Presumably in this case businesses were paying for things like marketing advantage, contract opportunities, etc, which is probably not something that ought to justify tax exemption.
When I pay tax I have no say in how that money is spent. These rich donors are able to choose not to remit their tax to government to spend on, say, the NHS or education, but to their favourite charity. This is a sensible move to limit the loss to the government. This does not prevent them donating from their tax income.
This would be true if it wasn’t for the fact that the Government is systematically cutting funding to the arts whilst claiming that philanthropy will close the gap – giving to the arts will not fill the gap under this proposal. So they are cutting the funding and cutting another vital source of funding which primes creative risk taking. This is a typical example of a policy shotgun /trawler net policy catching all without nuance.
One way out of this problem is for the government to collect its tax on charitable donations and pay it into a national charity fund, from which it is allocated to charities by a due process that meets the governments stated priorities. There are plenty of charities working in health or overseas development, which might be given a higher priority than donkey sanctuaries.
I can easily see why it is possible to make a principled case that rich people should not be able to get charitable tax relief, but this proposal doesn’t deliver. If you earn £40m, you can still donate £10m, and thus get £4.5m out of the tax man. (Note too that donating money does not leave you better off – it is still costly, even after the tax break).
It is also very easy to avoid. You can set yourself up as a company, and have the company donate money, rather than you. Then you pay yourself the money left over. Bingo – tax avoided. Or you donate more in high income years, to your own charitable foundation – thus getting round the 25% rule. Result – tax avoided.
I bet it raises less than £10m. To get all this bad press for a policy that doesn’t work and won’t raise any money is not good politics.
So if someone has 40 million per year, they have to pay 45 percent on it – leaving them with 22 million as 18 million has gone to the revenue,
If they donate 10 million to charity, then they pay tax only on the remaining 30 million. leaving 16.5 million with them, 13.5 million with the revenue and 10 million with the charity.
Of course the statists now want to change this, so that the charity now gets 5,5 million and the revenue still gets its 18 million. They should just be honest about this instead of claiming that the guy who has reduced his net income from 22 million to 16.5 million is some kind of evil tax dodger – isn’t it more likely that he simply despairs about how the government wastes its money? The exception is of course the case where the 10 million goes to a charity based in “Eastern Europe” (donating to charities working abroad but headquartered in London seems to be fine), where the implication is that the 10 million has somehow been funnelled back to the tax payer leaving him with 26.5 million instead. This is only implied by the article – presumably because no case of this happening has ever been discovered. To me this kind of kneejerk Eastern-Europe bashing and rich-bashing is exactly the same mentality as gay-bashing, ginger-bashing etc. etc. etc. – we need to stop letting the government use rich-bashing (which they themselves don’t believe in) as an excuse for policies motivated by completely different things. I sometimes think that people in this party would support the recent beefing up of the RIPA if only it was presented as being about catching rich tax-evaders.
the bad publicity is, as usual, all about the media making a story out of the superficial. Clearly there is a problem here and more than a few loopholes. The reason the media are making a mountain out of it is that their owners are milking the system.
Surely it would be relatively simple to limit tax free giving to real Charities, ie those that are Uk based and are operating within the Charity Commission rules, only.?
I find it very difficult to make sense of this article.
Apparently. it defends the government’s policy on the basis that:
(1) Donations to foreign charities shouldn’t be tax exempt. Yet the government proposes to continue to treat foreign charities and UK charities identically.
(2) The government is “within its rights” to tax charitable gifts to increase the public revenue. Call me old-fashioned, but I’d have hoped that if that was the intention, the politicians could have had the decency to explain that that was their intention, justify the policy, and solicit votes on that basis. Of course, in these days of coalition government all that kind of thing has gone out of the window. But even so, the fact remains that what’s proposed isn’t the general introduction of taxation on charitable gifts, but a system of selective taxation according to who the gift comes from and how much they give. What on earth is that rationale for that, if we are talking about bona fide charities?
(3) The sums involved are insignificant, so it doesn’t matter anyway. In which case, what is the point? People will still be able to channel their money into phony charities, up to a prescribed limit, and the money diverted to state spending is negligible. Seemingly, this is just another PR stunt, with the novel feature that its effect is to make the government less popular, not more.
The only saving grace, as far as the Lib Dems are concerned, is that the identification of this measure as the “tycoon tax,” Nick Clegg’s personal initiative, hasn’t been carried through by the media since Budget Day.
I agree with Chris’s points, to just pick up on a couple of Paul’s points:
“…that the government is not very good at spending money, so therefore giving to charities instead is justified. Come off it. I have seen the internal workings of some charities at close quarters. It really is preposterous to say that the government is any worse or better at spending money than charities.”
The problem isn’t so much how efficient they are at spending money, as the overheads incurred. By making a donation directly to a charity, I avoid having to pay the overheads of a government bureaucracy. As any one who has been involved with government funding will know, significant amounts of money and time are consumed by the layers of funding agencies through which government monies cascade, who not only require formal bids but also reports on how such monies are spent and where such requirements vary little between £100 and £1m …
“according to the minister who explained the situation very well on Today this morning, talking about £50-100 million per annum here.”
I have a couple of observations that Paul (or others who support his viewpoint will need to address):
“… if the purpose is to reduce the national debt, why not do as the Indian government suggests, and cease giving it £280m a year in aid …” (Dominic Lawson writing in i on 17Apr12) and hence totally avoid having to introduce changes to tax relief on donations to UK registered charities.
Secondly, the government could do lots more to save money without actually making any cuts to key services, a good example being the £250m that Eric Pickles Communities Department was able to find and throw at weekly bin collections last year.
Fundamentally, what Paul Walter and others fail to grasp is that there are approximately 300,000 people with incomes over £150,000, with the majority I suspect having earnings in the £150,000 to £1m bracket (rather £10m plus). Depending upon tax rates, it is in this income bracket that many of the tax avoidance schemes start to become financially viable, once such arrangements are set up it is unlikely the government will ever those tax revenues again. Hence the questions are how do we reassure these people that they will be able to keep the rewards from their efforts and also to encourage them to get into the habit of reinvesting their wealth into the UK economy rather than investing in tax avoidance schemes which only leave the country poorer.
As for the “You can set yourself up as a company” etc. etc., remember if the company is UK registered, it will be liable for VAT at 20% on all it’s income, so the Treasury doesn’t loose out quite as much as people would have you believe…
“As for the “You can set yourself up as a company” etc. etc., remember if the company is UK registered, it will be liable for VAT at 20% on all it’s income, so the Treasury doesn’t loose out quite as much as people would have you believe…”
I don’t think you as a company pay VAT on all your income “profits” , you only pay VAT on goods and services and if you are a registered company you can claim VAT back in certain circumstances.
So the treasury looses out more than you think 😉
“I don’t think you as a company pay VAT on all your income”
MATT, You have obviously not set yourself up as a company (as per Tim’s suggestion), run a company or been VAT registered. I strongly recommend you educate yourself.
As a (UK registered) company where you are effectively selling your services (which is where Tim was coming from), effectively everything you invoice will be liable for VAT at 20%. Yes there will be some relatively small adjustments with respect to offsetting VAT paid on certain expenses against the VAT on your invoice, but in the overall scheme of things the major income stream will be the monies received for your services.
Hence to have £1M in the company to ‘play’ with, you will have to invoice for £1M + VAT @20%, of which you will pay HMRC £200,000 less the VAT already paid on certain expenses. Now your £1M enters the company umbrella and can be massaged so as to minimise NI, income tax and corporation tax. Depending upon the accountant and how far they may support you in bending the rules, you should be able to net somewhere between 50~90% of this. From discussions in the freelancer forums, to retain over 80% you are likely to be using questionable practices that may not stand up to HMRC inspection and challenge… So whilst there is opportunity within the company umbrella to save tax, you are still likely to end up paying between £~200k to £~500k in income, NI and corporation tax on top of the £~200k of VAT already paid (and so could, if not careful, end up paying more tax than an employee!).
Compare the above to getting £1M as a salary (which will cost the employer ~£1.15M), where the total tax take (NI and income tax) is £~650,000 (before allowing for pension contributions and charity donations). so whilst there is the potential for a significant saving in total tax paid, it isn’t as headline grabbing as highlighting the saving on income tax alone.
[Aside: I’ve totally ignored off-shore arrangements and VAT scams; both of which are probably closer to tax evasion than tax avoidance.]
Can someone explain why donating money direct to a Romanian orpahnage is bad, but donating money to the London office of an organisation raising money for Romanian orphanages is good? Surely it is less efficient to do it that way.
At the end of the day though we are dealing with people who believe that every banknote with the Queen’s head on it is the rightful property of the government and not of the person who created the wealth it represents – so this will probabaly go through.
@Roland – it depends on the original source of the money. The “bigger” company which would under normal circumstances be paying you one million pounds salary as a manager, will have the same costs if you invoice them one million pounds plus VAT consultancy fees (as they themselves can claim back the VAT they are interested in the without VAT sum). What you then claim back is plus to you.
If you go off a million pound salary and start invoicing your old comapny 833,333.33 plus VAT you’re doing yourself over.
This is why some countries in Europe have a flat-tax system. In Slovakia wages, Capital gains, bank interest, housing rents, corporate profits, sole-trader profits, author’s royalties are all taxed at 19 percent.
@Richard
Agree there is a source dependency and that depending on how the “bigger” company puts you through their books they may be able to reclaim the VAT you charge them and hence make you cheaper to them than if you were on the payroll.
I was trying to just focus on the transaction between the source of the money and an individual’s personal company to keep things simple and to show that it is the total tax take that should be considered and not just the income tax component.