This year’s budget was, in general, a good one for Lib Dems. Most notably, the party’s number one priority of taking more low-paid workers out of tax was fast-tracked, while the controversies, and specifically the cut in the 50p top-rate at a time when pensioners’ tax allowances are being frozen, have hit their Tory backers’ support in the polls.
However, there is one lesser noticed and malign Budget change, the ‘Charity Tax’ — a cap on tax relief which threatens to cost the charitable sector hundreds of millions of pounds — which has not attracted mainstream media attention. That needs to change if the Coalition is to be talked down from a policy with Lib Dem fingerprints on it, and which will undermine philanthropic giving at a time when it is needed more than ever during the public funding squeeze.
What the ‘Charity Tax’ is
“What is the ‘Charity Tax’?” you ask. Well, the harsh truth is it’s Nick Clegg’s fault. Why? Because the ‘Charity Tax’ is a direct consequence of the ‘Tycoon Tax’ which Nick personally championed in return for the Tories’ wish to cut the 50p tax-rate. The ‘Tycoon Tax’ is a justifiable and progressive attempt to clamp down on the excessive use of tax-reliefs which often result in the very wealthiest having a lower overall rate of tax than the rest of us.
But there is an unintended consequence of the ‘Tycoon Tax’, and it’s this: because it will also cap the tax-relief on charitable giving available to wealthy philanthropists many will end up scaling back their generosity. For the details of the tax changes I recommend this Charities Aid Foundation article — but the following example illustrates the problem:
Felicity Culture-Vulture earns £800K and is a 45%-rate taxpayer . She makes a lump sum gift of £1m to a local museum to help build a new education centre. Through Gift Aid the donation is worth £1.25m to the museum after basic rate tax has been reclaimed. Under current rules, Ms Culture-Vulture is then able to claim back £312.5K in personal tax relief for herself, which she plans to give to other causes. However, under the new rules, her tax relief would be capped at 25% of £800K, i.e. £200K. This means that she (and the other causes she supports) would lose out on a potential £112.5K.
Why tax relief matters to good causes
Some folk tend towards the cynical when it comes to philanthropy (I’ve a sneaking suspicion some of them work for HM Treasury), so I’d like to tackle two questions often thought if not always spoken out loud…
1) “Isn’t this just another form of tax avoidance?”
Simple answer: no. It is absolutely impossible under UK tax law to make a financial gain by giving money away to charity. In the example above, ‘Ms Culture-Vulture’ did not benefit financially — she voluntarily opted to become worse off to the net tune of £487.5k, a sum she was under no obligation to hand over. The beneficiary was the charity and those who will enjoy its services.
2) “Are you saying philanthropists only give because there’s tax relief?”
Simple answer again: no. Tax relief is not why wealthy people donate: like the rest of us who give to charities they are motivated by supporting a cause they believe in. But tax relief is a strong driver of how much they feel able to afford to give.
I sense there may still be some sceptics who shrug, and say “Tough, they’re wealthy enough, they should just dig deeper in their pockets if they’re really passionate about their philanthropy.” And I’m sure there will be many philanthropists who do precisely that. But realistically there will be others who choose not to, and who will reduce their charitable giving because they believe they can no longer afford (relatively speaking) to give as much as they can under the current system. If so, the wealthy won’t be any worse off; charity beneficiaries will be.
Initial estimates (and they are only that) suggest good causes could lose out substantially. This statistic shows why: of the £11 billion given to charity last year, almost half was donated by just 7% of donors.
The Lib Dems and the ‘Charity Tax’
Six months ago I posed the question here, ‘What is the Lib Dem position on ‘The Big Society’?’ — and was forced to conclude that the party didn’t really have one. That gap has become much more apparent in the last fortnight.
What I suspect happened in the budget negotiations is this (this at any rate is how I’ve rather shamefacedly explained it to my colleagues in the charitable sector who’re curious why the Lib Dems are so keen on the ‘Charity Tax’)…
Rather late in the day, Nick Clegg and his advisers hit on the idea of the ‘Tycoon Tax’ in exchange for dropping the Lib Dems’ opposition to the 50p rate. Even later in the day, someone noticed that charitable giving would be caught in the crossfire. So a caveat was hastily inserted promising “the Government will explore with philanthropists ways to ensure that this measure will not impact significantly on charities that depend on large donations.” The Treasury is now into its formal 90-day consultation mode, and met with charity campaigners this week. With luck — and with pressure — they may see sense and exempt charitable giving from the tax-relief clampdown. The current mood music is not encouraging, however; once the Treasury sniffs revenue they are doggedly tenacious in keeping it — “entrenched” is the word I’ve heard used to describe their attitude.
I don’t mind whether it’s called the Big Society, civil society, or the third or charitable sector — what I do know is that it depends on philanthropic giving, on private individuals choosing to give away their money. For the sake of all good causes the ‘Charity Tax’ needs to be stopped.
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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11 Comments
You are too harsh on Nick. I don’t think anyone ever thought that Nick was including either pension contributions or charitable giving in the definition of your income, on the grounds that you are not getting the income. at the point you are taxed! In the case of pensions, you are taxed when you finally get it, in the case of charity giving you never get it, so you are never taxed.
You can argue that it is odd that if someone on less than £10k gives a £1, the charity gets £1, end of story. If a basic rate tax payer donates £1, the charity gets £1 + 25p from govt. If a 45% tax payer donates £1, the charity gets £1 + 25p from govt, and the taxpayer gets 31.5p back from govt.
I hope govt listens. Charities are struggling as it is, without govt reducing their funding. We should all write to Danny Alexander…
I do not know what is meant by “Tycoon Tax”. Giving taxes silly nicknames which do not explain what they really are hit us back big time with the “pasty tax” and the “granny tax”, didn’t it? I’m afraid from the way it emerged I just wrote of “tycoon tax” as some sort of wishy-washy pledge to try and find a way to block a bit of tax avoidance. If there really is some hard and fast way to block instantly all that tax avoidance and really make “tycoons” pay up, well, wouldn’t someone else have thought it up and implemented it earlier? If I am wrong and there is some neat and obvious way that Clegg is proposing to deal with these issues, well, please can he stop patronising me and explain what it is instead of assuming I will be mightily impressed by just this constant repetition of the phrase “tycoon tax”?
If the answer to my question is that it is a block on all the multitude of tax allowances that may be claimed if you have a clever enough accountant, well, I am sorry, I think “all” must mean “all”. Once we put in one loophole, we open the door to many more.
The argument that someone who gives £100 to charity can’t afford it if exactly the same money goes from their pockets but the charity can’t get so much to up from it as it used to makes NO SENSE AT ALL to me. Sorry, maybe if you’re a tycoon you think differently, but to me £100 is £100, I’m happy to sign a Gift Aid declaration so the charity can claim more, but it’s still £100 from my pocket. I wouldn’t say “Oh, there’s no Gift Aid form for me to sign, so I’ll only give £50”.
Calling this a “Charity Tax” is the same sloppiness that got the freezing of extra tax allowances for older people dubbed the “Granny tax”. Many people, duped by this name, actually supposed it was special extra taxation on older people, which of course it was not. It was moving towards a system where they pay tax at the same rate as everyone else.
You tell us that Lady Bountiful gives a million to a museum, and because of that the government should also give money to this museum which it would otherwise be spending as the democratic wishes of the people wanted it to be spent. I don’t follow that – why should the government be shelling out so much money on whatever it is wealthy people like to give money to? I think if we are to have a scheme of “Gift Aid”, I’d much rather what money is spent on it goes to those charities with mass appeal, collecting large numbers of small amounts from large numbers of people. I just don’t want to live in a society which is so dominated by Lady Bountiful types throwing their money where they want – which, I’m afraid Stephen, quite often is things biased to THEIR interests. I don’t like using the word “democratic” in a way which does not mean actual rule by actual votes, it can be a dangerous misusage which damages the real idea democracy, but here I think there is some justification to it – concentrating tax relief of charity donations on small donations is more democratic.
Declaring an interest, I am the Gift Aid organiser for the church I attend. I don’t find the parishioners of that church think in this strange way that you say tycoons think. The transitional allowance of 3p in the pound on top of the 25p has recently gone, and I don’t think we’re going to find them saying “For that reason, I’ll put less in the collection”. Actually, of course, due to the raising of the tax allowance, a fair number will drop out paying income tax, and we shall have to tell them they are no longer eligible to be in the Gift Aid scheme. So, Stephen, why don’t you dub the raising of the income tax allowance which our party has been trumpeting so much a “Charity Tax” as well? I am reminded of that well-known passage in the Gospel of Luke: Chapter 21, verses 1-4.
Matthew Huntbach is right, and so is Stephen (good article).
This is all a perfect illustration of the perils of making policy on the hoof, and whoever advised Nick Clegg to bounce the so-called ‘Tycoon Tax’ on the party deserves hauling over the coals. This gimmick completely changed shape from when it was first announced (based on the Warren Buffett principle of a minimum tax rate) to when it appeared in the Budget. There is no apparent evidence base; it was not put forward for debating as Party policy when we debated tax at Gateshead; and there is no credible explanation for why charities are included.
The only explanation I have heard is that some very rich people abuse the charity system by creating trusts to pay for their hospitality. If true, that is a gross abuse of charity law, and the Charity Commission and the courts should deal robustly with what is, essentially, fraud. In any case, this form of tax avoidance should be dealt with under GAAR. To collectively punish all charities for the longterm underperformance of the Charity Commission and abuse of the system by a few individuals is utterly indefensible.
I have asked questions about this and received answers that were utterly unconvincing.
This is a classic case of policy making on the hoof (and, I expect, British politicians copying ideas from American ones and ignoring the differences between the two countries). In the US, there is a lot of middle and upper class welfare in the tax code (the techincal term is “tax expenditures”), most of which takes the form of deductions and credits. The UK system (data available here in pdf format) does this much less, and in any case prefers to grant tax relief by taking income outside the scope of tax altogether. Looking at the list of Income Tax reliefs in the large document, the only ones which take the form of deductions and credits that could be limited by the “tycoon tax” are:
– Employee contributions to pension schemes (explicitly outside the scope of tycoon tax)
– VCTs and EIS (already have limits, so probably will be outside the scope of tycoon tax)
– Professional subscriptions (not used by rich tax-dodgers)
– Seafarers’ Earnings Deduction (not used by rich tax-dodgers)
– Income of charities (includes Gift Aid)
– Reliefs that are too small to show up in the list (the main one I know about is the tax relief on investment in British films)
In other words, assuming that the “tycoon tax “is implemented in the obvious way, the ONLY big tax relief affected is the relief for charitable donations. If we exempted charitable donations from the “tycoon tax”, then there would be no point in introducing it (which is fine – it was a silly idea in the first place).
To make a minimum tax work in the UK, you would need to have to have people with above a threshold income file a second tax return to declare all their non-taxable income and allow the calculation of a “correct” top-line number to apply the minimum tax to. And this would mean that employers, ISA providers, National Savings etc. would have to provide the appropriate paperwork to all their employees and customers to allow a minority to fill in the second tax return.
Stephen,
didn’t our 2010 manifesto include a proposal to Introduce a single rate of 23 per cent for gift aid, removing the rebate available to higher-rate taxpayers?
I’m afraid I don’t buy your argument Stephen. The problem as I see it is shown well by your example. Culture Vulture is giving away some of her wealth to charity, this is a good thing, however her tax relief is on her income. We in the Liberal Democrats have long believed that income and wealth should be taxed differently and I think there is a case for saying that when somebody who is very wealthy gives some of their wealth to charity they should not get the same kind of tax relief as somebody who is giving away their income. The tycoon tax would allow somebody to get full releaf for donations up to and including their entire income (or at least that’s how I understand it), but the fact that they have wealth that far exceeds their income should not mean that they can gain more and more relief.
I’m all for tax relief and I think its right that a person who gives up their income to charity should not be taxed on that income, but I don’t see how the same applies to accumulated wealth, which is currently being taxed at a rate of not at all. When we have a wealth tax then we can give people relief on it, but why should we do so before then?
You say that this will reduce charitable giving, perhaps it will (though your assumption that people give their tax relief to other charities sounds rather dubious to me, don’t people like to give nice round figures and just ignore the small change? However I think it will have some positive effects. In my experience of fund raising, which is admitidly very limited, it is already far to atractive for charities to focus on high net worth individuals as the main source of their income rather than engaging with ordinary people. When this is coupled with arguments about tax relief and estate planning, as it so often is, the entire institution of philanthropy can be debased. People should give regularly to charity, which is the way that would maximise their relief under the current system. They shouldn’t ammas large amounts of wealth and then try and plan their spending so as to optimse their tax burden.
For the largest charitable donors unlimited tax relief seems to be rather undemocratic in that it allows the people with the largest incomes to decide where their taxes are spent.
While I am more than happy for Felicity Culture-Vulture to donate £1 million of her own money to support the museum she loves, I am less keen that she should be able to choose that a proportion of the general tax pot should also be diverted to the causes of her choosing.
Have I misunderstood the principle behind this tax allowance? Is there a good reason why rich people should be able to choose how their taxes are spent?
How about Ms Culture Vulture pays some income tax, and then our elected representatives can spend that revenue where the need is greatest? Many charities are commissioned by councils etc to deliver public services anyway. The main problem with these proposals is for charities that act as tax dodges or lobbying fronts. Tax exemptions and deductions should definitely be capped.
I am sad to say that I have to agree with some of the above. If the Tycoon Tax is to have any point at all it must include charity donations, Otherwise the whole thing is a waste of time. And also in this current time of cuts, surely the state is as much in need of the extra revenue as charities? The purpose of the Tycoon tax is as much as an anti-avoidance mechanism as anything else. In this capacity it is vital that we do not water it down.
I agree with Stephen Tall. I have received a weekly briefing from Tim Gordon, our new Chief Executive on charitable tax relief which begins: “Liberal Democrats believe it is right to cap tax reliefs for those with the largest incomes because the very wealthy should not be able to wipe out their tax bills year after year”. He does not say how many Liberal Democrats believe this or how he knows this. Maybe some Liberal Democrats do, or maybe it is only George Osborne.
Lord Jacobs a notable philanthropist and until last year a Libdem Peer, had a letter on this published in the Times yesterday. The Government should continue to give full tax relief for all charitable donations. The saving from the proposed reform would be minimal and it would send out the wrong message, and make it much more difficult for charities to continue their vital work.
@ Simon Beard
It is not true that there is unlimited tax relief for gifts to charity, Broadly tax relief is ony allowed if the gift is made out of income or chargeable gains, or on death. See http://www.hmrc.gov.uk/individuals/giving/assets.htm#3