After a week of intense criticism from charitable organisations, the public and press, Chancellor George Osborne appears ready to concede ground on his controversial plans to limit tax reliefs on charitable donations.
Currently, higher-rate taxpayers donating to a charity can reclaim more than half of the tax. Under gift aid rules, if a person paying 40% income tax wants to donate £1m to charity it will actually only cost them £750,000. While the charity will actually receive £1.25m thanks to gift aid, the donor is eligible to claim back a portion as tax relief.
From 2013, under the new plans, the amount of tax relief that higher-rate taxpayers can claim will be capped at £50,000 or 25% of their income – whichever is higher. Using the above example, the £1m donation would therefore cost the higher-rate tax payer £950,000 – £1m minus £50,000. (However, if the taxpayer has an income of over £1m they will still get their full £250,000 of tax relief as it is no more than 25% of their earnings.)
Ministers say that this change will prevent “abuse” of the tax code that allows very rich people to reduce their tax rate. However, charities argue that the move will put off donors and cost them millions of pounds.
Cap for “super-rich”
The Treasury used the recent Budget to announce the cap in relief for philanthropists. According to Osborne, the cost of the “super-rich” making large donations to pet causes simply to reduce their tax liability costs the Exchequer between £50m and £100m a year.
However, if the government’s goal was to create a fairer system, the move has backfired hugely – with even the Conservative press calling the measure an attack on charitable giving.
While Downing Street has this week announced a “full, formal consultation” – prompting speculation that they may quietly drop the proposal – PM David Cameron is still publicly resisting pressure to perform a U-turn and exempt donations from the cap altogether.
Last weekend, the Charities Aid Foundation published a survey showing two-thirds of government backbenchers believe tax relief on charitable donations should be exempt from the cap and that the government should review its proposal.
Impact on charities’ work
Meanwhile voluntary sector organisations have been united in their criticism of the plans, especially those who rely predominantly on large donations from a relatively small number of wealthy donors.
Jeremy Newton, CEO of Children & the Arts, argues that targeting philanthropic activities in this way is counter-productive and potentially threatens the sustainability of charitable organisations and their good causes.
“The issue here is much more about the clarity and consistency of the message than it is about the detail of any specific change to tax legislation,” he says.
“Government policy, articulated frequently by Ministers such as Nick Hurd, Jeremy Hunt and Ed Vaizey, seems to be to encourage philanthropy as a positive force for good in society, empowering charities to deliver high quality services to those in need.
“A new set of messages around ‘closing loopholes’, ‘combating tax avoidance’ and ‘preventing abuse’ invokes a wholly different and dissonant rhetoric, at odds with the stated policy and likely to be counter-productive with those who are undecided about whether or not to share their wealth with society at large.”
This sentiment is backed up by Phillip Spedding, Director of Arts & Business, another of the Prince’s Charities, who shared his views on BBC News this week. You can watch his interview in the clip below.
We will be following the government’s consultation closely and publishing any new developments on the Children & the Arts website, together with our analysis of what the implications may mean for UK charities.
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