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Tax expert says campaign against tax relief cap is 'a storm in a teacup'

Richard Murphy, Tax Research UK
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Tax expert says campaign against tax relief cap is 'a storm in a teacup'6

Finance | Kirsty Weakley | 27 Apr 2012

Charities should “step back from the storm in the teacup” and instead of asking the government to reverse its decision on the charitable tax relief cap, should campaign for broader reform of the tax system, says tax researcher Richard Murphy.

Speaking at a debate on the issue of the tax relief cap organised by the Oasis Foundation last night, Murphy, who runs Tax Research UK and was previously an accountant, outlined his proposal for scrapping all higher-rate tax relief and reforming the system to ensure that all donations of less than £5,000 can be assumed to have been made from taxed income.

In the 2011 Budget the government announced that charities would be able to claim gift aid on donations under £10, increased to £20 in the last Budget, without having to get signed gift aid forms from 2013. Murphy claimed that his plans are essentially an extension of those proposals. At the end of last month the government published a consultation document on the small donations scheme proposal.

Murphy said the current system of tax relief was unfair because the government gives more relief to those who give more. He explained that it costs 80p for a basic-rate taxpayer to give £1 to charity; for a higher-rate taxayer it costs 60p and for a 50 per cent rate-payer it costs 50p.

He said: “As a democrat and as somebody who believes all people have equal standing in society, I can see no reason at all why the government should act in such an extraordinary fashion.”

Murphy added that his solution was that “a simple application be made to the government quarterly by each charity for a tax rebate on the total sum received, with the rebate being £1 for every £4 given”.

He predicts this will have four outcomes:

  1. A reduction in the time it takes charities to process gift aid claims which would free them up to concentrate on core charitable activities
  2. Charities would be spared of asking donors about their tax status
  3. The tax system would be simplified
  4. HMRC’s time would also be freed up so they could focus on regulating rogue charities

However, the proposal did not receive much support from those attending the debate, who were sceptical of its chances of becoming government policy.

Steve Chalke, founder and chief executive of Oasis, accused Murphy of living in “Fairyland”.

Extent of the impact of the cuts

John Low, chief executive of the Charities Aid Foundation (CAF), who was there to put the case for the Give it back George campaign, told the audience that the cap would cost the sector “hundreds of millions of pounds” and it would not just impact on large charities but on smaller charities who receive funding from grants.

Chalke added that he had already had major donors write to him saying that they would not be able to donate at the same level.

Murphy challenged this, saying that because the cap applies to the largest donations “the vast majority of the 160,000 charities that exist in this country at this time will also be completely and utterly unaffected,” and that people who were that wealthy did not tend to check their tax status before deciding to give.

Low disputed that argument and said: “Nobody gives away £1m without knowing the tax position.”

 

Michelle
Freelance Consultant
29 Apr 2012

Mr Murphy doesn't seem to grasp the fact that money is leaking from the sector in the here and now. In a perfect world it would be lovely for charities to be afforded the time to input into a well thought through reform of the system - but it's not like the government has indulged in that and meantime crucial funds that services rely on are under threat. So, put a hold on this ill thought through 'reform', do the hard work Chancellor and then see where we are. Simples...

Trevor James
Consultant
Shen Stickland LLP
28 Apr 2012

Richard Murphy does not seem to understand that the reality is not that "the government gives more tax relief to those who give more " but rather that the government should accept that if an individual has renounced part of their income they should not be taxed on that amount from which they have had no personal benefit. It is a matter of simple maths.

If a taxpayer with an income of £95,000 makes no charitable donations they have £95,000 for personal use and should pay tax on £95,000.

If a taxpayer with an income of £95,000 makes charitable donations of £50,000 they have £45,000 for personal use and should pay tax on £45,000.

Adrian Beney
Partner
More Partnership
27 Apr 2012

"Murphy said the current system of tax relief was unfair because the government gives more relief to those who give more. " Ermm, is that unfair.

And..

It costs a 20% tax payer 80p to give £1 because that's what they took home after earning £1.
It costs a 40% tax payer 60p to give £1 because that's what they took home after earning £1.
It costs a 50% tax payer 50p to give £1 because that's what they took home after earning £1.

How is any of that unfair? Seems entirely equitable to me.

Kevin Russell
Technical Director
Stewardship
27 Apr 2012
Response to [Adrian Beney]

Well done, Adrian, for putting this difficult concept so simply.

The present system is perfectly fair.

Adrian's example also serves to illustrate why requiring the higher/additional rate taxpayer to direct 'their' relief to charity will leave the donor paying £1.20 (at the 40% tax rate) and £1.30 (at the 50% tax rate).

For the 50% taxpayer, they earn £1 and pay 50p tax. They then give 80p to the charity (now 30p out of pocket) and ordinarily claim back that 30p as higher rate relief, leaving them with nil. The charity has £1 (after gift aid reclaim).

If the higher rate relief of 30p is given to the charity, the donor has earned £1 and given away £1,30. Charity now has £1.30.

That is laudable. But surely the additional 30p donation should be the donor's choice should they wish to gift it? It is NOT a solution to the current discussion on the tax relief cap.

Greg Aitken
CEO
Hull & East Yorkshire Mind
27 Apr 2012

Whilst everyone would welcome a simplified tax system Murphy misses the point. The objection to the cap is not just about how much we can claim back but also the disincentive to givers to give. I'm sure one of the incentives for "the rich" to give to Charity is that it is preferable to giving it to government who spend it so badly.

Carl Allen
27 Apr 2012

Murphy, it is a storm but not in a teacup.

Nonetheless the campaign feels like a low cacophony of cries reminescent of the give it back Icelandic investment campaign.

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