Tax relief cap estimates just don’t add up

In the last week, we’ve seen some calculations from the Charities Aid Foundation and Oxford Economics estimating how much the tax relief cap will cost the charity sector.

At the moment, the Charities Aid Foundation says it will cost £500m. This has been extrapolated by Oxford Economics to a negative cost to society of £1.5bn.

But I’m not sure these calculations are based on solid assumptions.

Before I go ahead, I’d just like to say that in my personal opinion the tax cap is a bad idea, that the Give it Back George campaign is spot on, and that with a bit of luck David Cameron will indeed bin this whole policy as swiftly as possible. But that said, let’s get our numbers right.

CAF’s figure was extrapolated from the fact that David Gauke said the government expected to save £50m to £100m from charitable tax reliefs through the cap.

Their estimates are based on the idea that for every £1 given in tax relief to a major donor, the sector receives £5.

But for every £100 given, a major donor gets £31.25 in tax relief.

So for every £1 a major donor receives in relief, a charity receives £3.20. In most cases this is accompanied by another 80p in Gift Aid.

This means the absolute maximum amount the sector could lose, if Gauke is right, is £400m.

But this bill could be reduced a lot further, depending on certain factors.

For one, CAF’s calculations assume Gauke didn’t include Gift Aid in the revenue the Treasury would gain. This makes a big difference, because including Gift Aid, the government actually gives £56.25 in tax relief for every £100 given by a top rate donor. If Gauke’s calculations do involve Gift Aid (and it’s impossible to know whether they do or not) a £100m saving to government could cost charities the comparatively modest sum of £222m.

Furthermore, will people stop giving, or will they carry on? After all, if philanthropists continue to give but can’t claim tax relief, a gain of £100m to the exchequer wouldn’t cost charities a penny.

People will give less, of course – if the cost of something goes up, people do less of it – but we can’t assume that everyone will stop giving a penny over 25 per cent of their income.

If we use the most optimistic assumptions, the government’s total revenue from the cap could be as low as £50m, including Gift Aid. If half of that came from philanthropists who continued to give despite losing tax relief, the total revenue lost to charities could be less than £60m.

The worse case scenario, as mentioned above, is £400m. The truth is probably somewhere in the middle.

I’d also quibble with the idea, put forward by Oxford Economics, which says the social cost to the country is £1.5bn.

This is a calculation based on the fact that every £1 given to charity produces £3 of social benefit, and is based on CAF’s original figure of £500m.

If the actual loss to the sector is closer to £200m, the social cost is likely to be around £600m.

But Oxford Economics’ calculation also assumes that no one does anything socially useful with the £200m charities lose out on. If we assume that each £1 retained by the government and by philanthropists is spent to produce at least £1 of social benefit, then we’re actually looking at a total loss of £400m of social benefit, not £1.5bn.

Of course, it would still be better if the country didn’t lose £400m of social benefit, and if we stuck with the principle that money given away for the public benefit should not be taxed. But the actual loss to the charity sector might well be less than we feared.