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Christian charity opposes Red Cross tax relief cap idea

Kevin Russell, vice chair of Charity Tax Group and technical director at Stewardship
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Christian charity opposes Red Cross tax relief cap idea3

Finance | Tania Mason | 3 May 2012

Christian donor-advised charity Stewardship has come out against the compromise on the tax relief cap suggested by the British Red Cross and supported by the Institute of Fundraising.

The compromise mooted by the Red Cross would see the proposed cap applying only where the donor claims the relief for themselves.  The Institute, whose chair is the Red Cross’s fundraising director Mark Astarita, announced its official support for the proposal earlier this week.

But Stewardship’s technical director Kevin Russell (pictured), who is also vice-chair of Charity Tax Group, described the idea as “logically and technically flawed”. The NCVO has also declined to back the plan.

In a comprehensive response to the story regarding the Institute’s support for the idea on civilsociety.co.uk, Russell said the compromise proposal risks further damaging charity fundraising by cementing the misconception that donors claiming higher-rate relief are getting a tax break by giving to charity.

“We really need to get to grips with the false idea that a higher-rate donor receives an additional tax break over and above a basic-rate donor.

“A higher-rate donor is in exactly the same position as a basic-rate donor in that they are both deemed, for tax purposes, to have never earned the income that they have given to charity for the public good. No income, no tax. Charity gets all.

“It also needs to be understood that, in cashflow terms, the charity already gets that higher-rate relief from the donor.  So asking (or requiring) the higher-rate or additional-rate taxpayer to give the tax relief to the charity is effectively asking for them to be more than 100 per cent out of pocket on their donation.”

Donors forced to repay money to HMRC

Russell went on to voice his “grave concern” that the Red Cross proposal could mean that some donors will be forced to make repayments to HMRC, as well as losing their tax relief. This could happen if the beneficiary charity claims gift relief in excess of the amount that they would otherwise be entitled to under the donor cap.

He concluded by reinforcing Stewardship’s backing for the Give it back George campaign launched by the NCVO and Charities aid Foundation.

Russell said that Charity Tax Group did not yet have an official position on the suggested compromise, but would be considering it shortly.

NCVO: Current system is best

NCVO has also declined to offer support to the Red Cross/IoF proposal. Deputy chief executive Ben Kernighan said:  "The current system of higher-rate tax relief being divided between the donor and the charity serves charities well. Charities benefit directly and philanthropists have an incentive to give and to give more.

"It is hard to predict the behavioural change that would happen if this were to change and maintaining stability is valuable in these turbulent times.  What is crucial is that the government drops the tax relief cap."

Catherine Clark
Head of Communications, Marketing & Development
Royal School of Church Music
3 May 2012

I am also opposed to the Red Cross idea and as a result ended up in the minority in the recent Institute of Fundraising survey. (Just because one is in the majority does not make one right!) I have felt poorly represented by the IoF in this matter.

The Red Cross/IoF response is a hasty response to an idiotic, ill-conceived, almost bad-tempered idea of the Government's that we should have demanded, in one voice, to be withdrawn immediately. Charities and their professional representatives had no business handing a lifeline to the Chancellor in this way. Doing so has had the effect of making us appear to be making a second, even greedier grab at the wealth of supposedly tax-dodging philanthropists and I imagine will alarm major donors even further.

Thank you, Stewardship and NCVO!

Bill Giles
Principal
BGFF
4 May 2012
Response to [Catherine Clark]

I am afraid I do not undertsand how a charity is getting the higher rate tax relief from a donor at present, even in cash flow terms. As I undertsand it at present a donor paying standard rate tax pays the charity £100 and signs a gift aid form. The charity then claims a further £25 from the HMRC, the tax benefit, the donor sees nothing extra. However a higher rate donor doing the same thing ie pays £100 to the charity signs the gift aid form and the charity gets £25 back from HHRC however the donor gets a further amount back from HMRC the amount will depend on whether they pay tax at 40 or 45%. They are then at liberty to keep this refund or if they wish they can donate that to a charity, which many do. The Red Cross scheme, which seems very equable to me, would mean that the charity would get all teh tax relief on any donation where a donor has signed a Gift Aid form and pays sufficient Income or capital Gains tax to cover the tax relief that the charity they have donated to, plus any other charity donations they may make in the tax year amounts to.

I don't undertsand why higher rate donors should be treated any different to standard rate tax payers. Whilkst I agree that this is a ridiculous piuece of government legislation all of us standing togetehr with one voice has already happened, including quite a few MP's, and it has not as yet worked. The proposal by the Red Cross and the Institute seems to me to be a sensible way for the Government to achieve their wish of getting rich people to avoid paying tax and at the same time putting more money into charity coffers.
And Catherine, unfortunately democracy works in that way, you may be right, but if more people who vote/take part in a debate have differing opinions to you then their opinion will hold sway. The same is true in elections where, currently, the situation is even worse in that the person with the greatest number of votes is often elected even though the majority of the electorate did not vote for them.

Kevin Russell
Technical Director
Stewardship
5 May 2012
Response to [Bill Giles]

Thank you, Bill, for your comments. Your questioning is very important.

I apologise for the length of this reply but I have tried to explain in some detail why the higher rate tax ends up in the charity's hands rather than the donor's, without going into too much tax technical stuff.

In the past, it has been less important to understand what is happening to the personal tax position of the donor when they make a gift to charity under Gift Aid. However, now that we have the threat of a cap on charitable giving that, once analysed, is in effect a tax on charities' income, we need to be far clearer so that the policy and messages put out by Government, the Treasury and HMRC are the right ones and do not mislead the electorate.

It is totally wrong to claim that anyone giving to charity is tax dodging or reducing their rate of tax. The principal, which goes back to the beginnings of the income tax system in 1799, is that when someone gives to charity, the amount given is treated for tax purposes as if it were never their income as they have ceded control of it to the charity, for the public benefit. The same principle applies whether the donor is a basic, higher, or additional rate taxpayer. The system is not intended to benefit the donor, but the charity as they then receive untaxed income which is not (usually) taxable in their hands.

When we look at what is happening, it is essential that we compare apples with apples and not pears. Tax law demands that a donor making a gift under gift aid first deducts basic rate tax BEFORE they make their gift. Hence, the net and gross gift and the need for the donor to declare that they have paid sufficient tax to cover their (gross) donation. The tax relief that is given to the donor is established on the gross gift because this is the amount that the donor is actually giving away. So, in your examples, the amount given to charity is £125 of which the donor deducts basic rate tax of £25 before paying cash to the charity of £100. The charity, not being a taxpayer, can then reclaim that £25 from HMRC.

But the donor is liable to account to HMRC for the £25 deducted. The reason that they do not in almost every case is that they are also entitled to a £25 refund - being the income tax that they have paid on their earnings. Remember, the income given away is £125? Since a basic rate taxpayer would have already paid £25 tax (probably under PAYE) when they earned the £125, since the 1799 principle says that this is no longer their income, but the charity's, the refund due is cancelled out by the liability of the donor to HMRC on the tax that they deducted from their donation.

But the same principle applies for the higher or additional rate donor. They have given all £125 away (which is what the charity receives) and that is made up of net earnings (at 50% rate) of £62.50 and 'higher rate' tax of £62.50.

To put cash flow figures to it: the basic rate donor earns £125, pays PAYE of £25 and gives £100 to charity. Their tax position is that they are due a tax refund (at their highest rate of tax, which happens to be the basic rate) of £25 but they are also liable to HMRC for the £25 tax deducted from their donation. Result - no net liability. Charity has £125, HMRC nil, donor nil.

The 50% taxpayer earns £125, pays £62.50 tax under PAYE and gives £100 to charity. They are now £37.50 out of pocket. Their tax position is that they are due a tax refund (at their highest rate of tax, 50%) of £62.50 (under the 1799 principle) but they are also liable to HMRC for the £25 tax deducted from their donation. So they can now reclaim only the difference between the 50% rate and the basic rate on their £125 donation. Result - they get back the £37.50 that they are until now out of pocket on. Net results: Charity has £125 (£62.50 net and £62.50 tax), HMRC nil, donor nil.

Of course, the charity will be unaware of the donors personal tax position and that the £125 that they have received splits in the way that it does. They don't need to. But the donor's cash position is important.

Under the Red Cross proposal, Option 1 is that the 'higher rate donor' can only get their £37.50 back if they give £162.50 to charity (which would mean they are giving £200 out of their pre tax earnings away). Under Option 2, HMRC are allowed to apply the cap as presently proposed.

Neither is palatable since the reality is that the donor will cut their giving to the charity under either Option in order to return their net position to that of today. Remember after all, that we are talking here about the giving of very generous, often sacrificial, givers who not uncommonly calculate what residue of their income they need to live on (and pay tax on that, incidentally) and give the rest away.

I hope that helps!

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