Charity Tax: let’s treat all citizens equally & let’s democratically agree what constitutes public benefit

by Stephen Tall on April 16, 2012

I suggested at the end of last week there were reasons to be encouraged that the Coalition might see sense on the Charity Tax. And according to today’s Financial Times there does indeed seem to be signs of concession, albeit not a total U-turn:

People close to the chancellor have told the Financial Times Mr Osborne is considering two proposals in particular to limit the damage done by his proposed cap on tax reliefs of whichever is higher: 25 per cent of a person’s income or £50,000. One plan is to have a separate limit on charitable donations of 50 per cent of a person’s income, allowing charities to claim tens of millions of pounds more in reliefs than under the current plan. Another is to let donors roll over any unused tax reliefs into future years if they are used for donations.

Treasury officials are locked in talks with representatives from the voluntary sector, and expect to make final decisions on how best to mitigate the effects of the planned cap in a few months. But they estimate raising the ceiling for charitable donations to 50 per cent would cost £40m, taking the overall savings from capping charities tax relief down to just £20m. However, the suggestions are unlikely to stop calls from the charitable sector and every main political party for a complete reversal.

The Chancellor’s plan is very close to the USA’s approach to encouraging philanthropy, where there are three components: 1) a cap on relief of 50% of income, 2) the ability to roll this over for up to 5 years, and 3) charitable donations are treated separately from other tax reliefs.

This final point seems to me important, as it’s the Treasury’s and Government’s conflation of charitable giving with other tax reliefs which has most caused most grief in the past week. The Treasury’s own figures show that charitable donations account for a minority (c.20%) of the tax-relief the cap was supposed to prevent, yet it is the item the Government has focused on in its defence of the measure over the past week. As I said last week, for me the principle is that we shouldn’t tax income that is voluntarily foregone for public benefit.

A big part of the reason this is so controversial and has thrown up the debate it has over the past week is two-fold:

First, that higher-rate taxpayers are sometimes treated differently from basic-rate taxpayers. I say sometimes because if you’re a salaried employee you have exactly the same charitable tax-relief status as a higher-rate taxpayer — you can donate to charities wholly net of tax through Give-As-You-Earn (GAYE). However, if you’re self-employed or freelance you can’t. That’s wrong. And it’s not how it works in the US, where any individual regardless of income is equally able to offset their charitable giving against tax.

Secondly, that there is clearly appetite for a debate about what constitutes a charity and the public benefit it generates. Should donkey sanctuaries, Oxfam and Children in Need all have the same status? Personally, I think they should. Indeed, I’d extend the definition to include political donations, as that’s where I direct chunks of my voluntary giving in the belief that campaigning organisations are often best-placed to achieve public good. Others will disagree, though. But let’s have that national conversation, rather than play around with the the tax-system as a proxy for that debate.