Posts Tagged: Gift Aid reform

Could lifetime legacies fit the bill if Gift Aid reform fails to satisfy?

In the very near future, a group of third sector bodies will put forward a series of recommendations to the Treasury for Gift Aid reform.

Sadly, these look likely to be relatively modest, compared with what sector figures once hoped to achieve. And as a result, some sector figures are looking around for other models they can use to improve tax reliefs for giving, and it looks like lifetime legacies might fit the bill.

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Can Gift Aid reform break out of this Sisyphean state?

When I was at school, an enthusiastic teacher decided to educate us in the Greek myths. One was the story of Sisyphus, who irritated Zeus, the king of the gods, and was condemned in return to push a rock up a hill for all eternity. Once the rock got to the top, it would always roll down the other side, and off he went again.

This piece of classical trivia has given rise to one of my favourite words, Sisyphean, describing a long and continuous labour with no obvious end in sight. It’s a word that could be used to describe Gift Aid reform, a process which has been going on in one form or another ever since this tax relief was first granted, and appears no closer to its conclusion.

The new government has said it will present a general plan for reform in September, and has pledged to “make an announcement about Gift Aid in the next Budget” – although it’s vague on what that announcement will be.

It’s doubtful that this will be an end to the process, but there may be some progress. However, none of the more radical proposals suggested last year – such as opt-out, accounts-based or higher rate relief for charities – look like they will be considered.

The sector seemed to be moving in favour of a composite rate – a single rate of Gift Aid for all donations below £10,000, with a corresponding loss of relief for higher-rate taxpayers but with an exemption for big donors who really care about their tax relief. It doesn’t look likely that this will happen, either. The Treasury is worried about its cost; HMRC is worried about the potential for fraud, and in any case both departments have bigger fish to fry.

What we’re likely to get is a promise to streamline the system, which may be a better deal for the sector as there are some real victories to be won here.

First and foremost is a promise to allow charities to file and store Gift Aid claims online. Second is a donor database, which would allow donors to confirm that they agree to Gift Aid on all donations they make to any charity in the future. Unsurprisingly, however, HMRC has shown little enthusiasm for keeping such a database.

There are other possibilities, too, but there is also one certainty: there is a still a long way to go.

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Charities could face tax bills that cancel out their relief

How much tax does the charity sector pay? It’s not meant to pay any, in theory. But in practice it pays a lot, it turns out, according to a very informal survey I carried out last week.

Having spoken to a few charities’ finance directors, it appears many operational charities pay around a tenth of their total income in tax – and this could increase considerably if post-election tax rises come in the form of VAT and national insurance.

We haven’t seen it in this Budget, but it’s likely to come in any post-election announcements. In a worst-case scenario, of every pound given to an operational charity, 12 or 13 pence could end up in the pocket of the Government.

In total, it’s possible the sector will end up paying more than £1 billion in VAT – and it could well be facing a similar bill for national insurance. Add on business rates, water rates, and other taxes that the Government hasn’t exempted the sector from and the bill starts to look pretty high.

In comparison, according to HMRC, the sector received £951m last year in Gift Aid, and around £2.3 billion in tax relief overall. Or to put it another way, the tax the sector doesn’t pay looks pretty similar to the tax it might have to.

So what should the sector do about it? Move all its money offshore? Hire a dodgy accountant to cook the books?

One answer – suggested by one of this site’s bloggers, Charles Nall, corporate services director at the Children’s Society – is to focus not on Gift Aid reform, where there is potentially little money to be had, but on tax reform.

Less fashionable, more difficult and less easy to understand – but the rewards are potentially much greater.

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Cancer Research UK’s proposal on Gift Aid reform is by no means perfect

It is good to see Cancer Research UK taking the lead on Gift Aid reform by supporting a 30p composite rate.

It’s an idea that means charities would receive 30p in Gift Aid on every £1 given by a taxpayer, and higher-rate taxpayers would lose the right to claim any personal tax relief on donations.

Progress was needed. Before there can be a sensible debate with the Treasury over reform, there needs to be something to discuss, and the plethora of different options that existed at the start of the year simply weren’t tenable.

However introducing a 30p composite rate would still raise problems. It’s difficult, for instance, to justify labelling a composite rate as tax relief rather than public expenditure.

That’s because the system would mean that if a donor gave £1 to charity, that charity would get an additional 30p even if the donor originally only paid 25p tax to get that £1. Can a tax relief give back more money than the donor originally earned and paid in tax? Or would it have to be called public expenditure?

At present, charities receive 25p as a tax relief on every £1 donation, and then another 3p in public expenditure – transitional relief. That public expenditure can easily be taken away, and in fact it will be in just over a year’s time.

Tax relief, by contrast, is much harder to withdraw, which means that any decision to reclassify Gift Aid as public expenditure would leave the sector vulnerable – and has been ruled out by third sector minister Angela Smith.

It may be possible to label a composite rate as tax relief – an argument between the Treasury and the ONS is going on over this at the moment – but it would not be an easy battle.

It’s also not clear how a composite rate would sit alongside payroll giving. Would payroll giving continue to roll on independently, offering a different system of tax relief to Gift Aid? Or would a giver receive an extra reduction in tax, above and beyond what he paid? Or would it be scrapped altogether? None of these options sound good.

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