Time for Nick Clegg and the Coalition to see sense and stop the ‘Charity Tax’

by Stephen Tall on April 4, 2012

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 Tall is Co-Editor of Liberal Democrat Voice, and also writes at his own site, The Collected Stephen Tall.