24 Jun 2016
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The prospect of a curb on tax relief for major donations is consigned to history for now, but the sector should not assume it has disappeared forever, says Matthew Bowcock.
The announcement by the Chancellor in the 2012 Budget on 21 March that from April 2013 a cap would apply to all unlimited tax reliefs, including donations to charity, caught almost everyone by surprise: charitable sector leaders, members of the government and backbenchers. It took some time for the implications to be fully appreciated but, once understood, there was a vociferous backlash from charities, philanthropists, professional advisors and most commentators. A campaign to exempt charitable giving from the cap, called 'Give It Back George' and led by CAF and NCVO, garnered widespread support and the media carried extensive articles and editorials on the subject.
Apart from a small number of dissenting voices that supported the premise that it should not be possible for individuals to reduce their income tax to zero, the majority of observers called on the Chancellor to reverse the decision. Unfortunately, the government’s initial defence of the proposal inflamed the issue and insulted donors, as issues of fairness in taxation were conflated with tax avoidance.
After extensive consultations with charities and philanthropists, the Chancellor announced on 31 May that the measure would be withdrawn and charitable giving would not be included in the cap on unlimited tax reliefs.
The 'Charity Tax' proposal, as it came to be known, paralysed giving by major donors and consumed valuable time and energy of government ministers, charity leaders, philanthropists and civil servants. What lessons can be drawn from this experience that might, in some small way, offset this cost and reduce the chance of such a debacle occurring again? This paper is written for all those involved in the Charity Tax debate to stimulate debate on the future of philanthropy in the UK “after the tax”.
It is rare in the charity sector for such disparate individuals and organisations to unite behind a single issue. Opposition to the proposal spanned causes as well as political parties, social classes, income levels and nations. Since the growth of free associations, independent from the State, during the 19th century Britain has developed a mixed, plural society which is a model for other countries, but it relies on a balance between business, government and civil society. The charity tax proposal threatened to change the relationship between government and charities and to undermine the principle that you should not pay tax on what you give away, which resulted in an extraordinary demonstration of the value which is placed on civil society in the UK by a broad spectrum of citizens and institutions. It was possibly the first time that the 'third sector' has asserted its independence and presented a united front to challenge government. In view of the steady erosion of the independence of the charitable sector over the past fifty years, this campaign could represent a line in the sand and lead to greater independence of the sector and a stronger voice in future.
The Chancellor’s proposal was dramatically inconsistent with other government announcements, programmes and policies, including additional tax relief to encourage greater giving through legacies that the government had announced in the previous year’s Budget. This was not the first time that the government, particularly civil servants, had demonstrated a lack of understanding of the role of philanthropy in British society with major donors, and so had struggled to fashion appropriate policies and programmes.
If the government wishes to forge ahead with its policy of encouraging more philanthropy, it will have to resolve the contradictions between fiscal and social policies and overcome a high level of cynicism and scepticism. Some joined-up government also needs to be demonstrated, as the campaign demonstrated how many different portfolios are in one way or another impacted by philanthropy, more obviously Cabinet Office and Culture, Media and Sport, but also Health, Communities, Education, Environment and International Development. It should be noted, though, that some philanthropists assert that if the government wants genuinely to promote a strong, independent civil society, it should step back and restrict its role to ensuring that a favourable taxation and regulatory regime is maintained.
Philanthropists themselves could do more to inform government’s policy in this area though, by participating in policy discussion and presentation of the impact of their donations. Currently, most consultation does not involve donors but intermediary organisations with vested interests which may skew the debate. More robust evidence of impact of philanthropy can also help to form government policy in many different portfolios, as philanthropists are often prepared to trial unproven ideas and take risks where government will, quite correctly, not spend taxpayers’ money.
Philanthropy was largely dismissed as a force for good in Britain during the latter half of the last century but there has been some evidence of increasing levels of giving by the wealthy. Few dispute that this should be encouraged and a ‘social contract’ developed whereby financially successful individuals feel a sense of duty and obligation to give to society. Controversy has only been around the entitlement to favourable tax treatment, not the value of charitable giving.
However, philanthropy in the UK is fragile and the behavioural psychology involved in giving away personal assets for the benefit of others is not widely understood, particularly in government where there is a natural preference for State engendered programmes. In a climate of widespread debate about disparity of wealth (which sometimes translates into crude assaults on wealthy individuals in the media) many philanthropists choose to give quietly, almost furtively, and to avoid public recognition. During the recent furore, these generous citizens, rather than being thanked and recognised by government, felt impugned and their motives portrayed as suspect by senior ministers. The damage that this has done to their enthusiasm for giving and the whole growth of philanthropy in the UK will not be known immediately, but could be extensive.
In 2011, the Philanthropy Review expressed concern that so little is known about giving patterns, particularly gifts by major donors, so it established a working group to find ways to fill this void. Apart from the NCVO and Coutts Million Pound Donor annual reports, there is virtually no information available on the proportion of higher-rate tax payers that give, how much they give and to which causes. HM Treasury expressed surprise at the level of opposition to the Charity Tax and observed that the charity sector’s estimates of the potential impact did not square with their figures. This may be because Treasury was also working from crude data. For example, Treasury may have only used a headline figure about the potential impact of the measure on the charity sector, but major donations are not evenly spread. Some charities, such as medical research, community foundations, universities and arts institutions are disproportionately dependent on a small number of major donors, while others that rely on large volumes of small donations from members of the public would have been largely unaffected by the Charity Tax. Better data could have led to better understanding of the impact and perhaps the proposal would never have seen the light of day.
It should be noted that this information cannot be gathered by asking charities to report on their major donors’ giving. Many philanthropists give to multiple charities in any one year, so a recipient of a gift of £10,000 has no way of knowing if the donor’s total giving in the tax year runs to £10,000 or £1m.
Accurate data on tax reliefs for charitable giving does exist, of course, in the HMRC computer systems. Subject to appropriate anonymising of data, it should be possible for HMRC, with the support of academics, to produce an analysis on an annual basis, which both the charity sector and government can use to monitor changes in giving behaviour, particularly whether more higher rate tax payers are giving, whether they are giving more, the proportion of giving coming from very large philanthropists and the causes they typically give to. This would not encompass all giving, only giving on which tax relief is claimed, but at least in the future, with accurate data, the government would be better informed about the impact of taxation changes and the sector could concentrate on the substance of proposed changes, rather than arguing over estimates of impact.
One reason for the 'Charity Tax' that was floated by ministers, including the PM, was that some major donors give to charities with questionable aims. There is a particular concern in HMRC about the opportunity for tax avoidance through use of charities in other EU countries with a lax regulatory regime as a result of the Persche case. HM Treasury acknowledge that this was not the rationale for the proposed cap, but the issue has now been widely aired and, although the value of donations to “dodgy” charities is thought to be small, damage has now been done to the reputation of all charities. The charity sector has the most to lose from questionable giving and needs to support both the government and the Charity Commission to develop a proportionate but watertight regulatory and tax structure and to come down heavily on any fraudulent activity.
Most large donors practice their art in private. They rarely network with each other and are not a cohesive group, particularly as they support widely differing causes. Though affected personally, most philanthropists relied largely on their recipient charities or charitable intermediaries to represent their opposition to the Charity Tax. It should be noted that this was to some extent deliberate; public opinion is increasingly resentful of wealth, so most affluent individuals declined to comment in the media, knowing that they were unlikely to attract public sympathy, however generous they may be.
Nevertheless, a number of new relationships between philanthropists were formed during this process and a number stepped forward to lead the public discourse. Their common interest in a favourable regime for giving, their passion for the causes they choose to support and the slight that they felt by being characterised as tax avoiders was evident. If philanthropy is going to be a growing force for social good in Britain, philanthropists need to organise themselves better so that they have a voice in future public or private policy debate. Philanthropy in the UK is currently represented by a number of organisations, each focussed on a different subset of philanthropy. Some rationalisation is needed, so that the common interests of major donors can be more clearly articulated.
One positive outcome is that a public debate about the role of philanthropy in Britain has been stimulated. There is an opportunity to build on this profile and develop a 'social contract'. The discourse has not been one-sided, though. Comments on newspaper websites have sometimes been surprisingly vituperative, implying that the poor are subsidising the rich, which betrays an ignorance of the fact that more than double the amount of tax has to be given away to claim tax relief. Criticism also focusses on giving to 'pet' projects, such as alma mater universities and private schools.
It would be naïve to assume that because the Chancellor has withdrawn the current proposal tax relief for charitable giving will not be questioned again in the future, as there remain two conflicting fairness principles. On the one hand, Treasury and HMRC argue that everyone should pay a fair share of tax and you should not be able to hypothecate their taxes; on the other hand, charities argue that you should not be taxed on what is not yours as you have given it away to society. These two principles are not easily reconciled.
Philanthropists should expect that they will come under increasing scrutiny and pressure to justify the public benefits that their giving delivers in return for tax reliefs. In any future debate philanthropy must find better ways to argue its value by presenting the benefits that it brings to society and correcting public misunderstanding. Evidence needs to go beyond quantifying the amount of giving, which is a crude ‘input’ measure, and include the economic and quantifiable social value delivered by philanthropic investments in projects, as well as the substantial benefit of time, talent and other non-financial resources that major donors often commit to the charities they support. Only then will the true value of independent philanthropy be appreciated and its role established in Britain’s culture.
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