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Gift aid research finds major donors unswayed by tax relief changes

Fundraising | Celina Ribeiro | 15 Dec 2009

Government research into possible reform of gift aid has concluded that higher rate tax payers are unlikely to be massively deterred by tax reform, and appears to favour the introduction of a 37p-per-£1 gift aid rebate directly to charity for all donations.

The HMRC and Treasury today released a report into two possible avenues of reforms of gift aid, both of which abandon the option of higher rate tax payers to reclaim additional tax relief on donations.

The report suggested that “changing the tax system would make little difference to donations from major donors”, but elsewhere said that “any changes would be likely to have winners and losers”.

One option for reform, called the ‘redirection’ option, would see higher rate tax payers tick a box to identify themselves as higher rate payers and automatically redirect the tax relief to charities. This option would result in charities receiving 50p in tax relief per £1 donated by a higher rate tax payer automatically, as opposed to receiving 25p and then encouraging the donor to reclaim tax.

The second option involves the introduction of a composite rate which would apply to all donations, irrespective of whether the donors fall into either a higher rate or regular tax bracket. The researchers, from University of Warwick and Bristol University, investigated setting this composite rate at either 30p or 37p per pound.

The study found that any slight drop in donations from major donors which could accompany the changes would be more than made up for by increased in income to charities via the higher rates. The redirection option was predicted to cause a 4 per cent drop in donations, and cost the Exchequer an additional 6 per cent to process.

The most valuable option to charities, according to the research, was the introduction of a composite rate set at 37p per pound, which the study estimated would result in a 10 per cent increase in donation value, but which would cost the Exchequer an extra 21.5 per cent to process. The 30p per pound, the research found, would result in a minor increase in income to charities of 2.4 per cent, but would result in a small saving to the Exchequer.

The research did not look into the feasibility or cost of implementing any such systems for charities.

Any change to the system, the report suggested, should be accompanied with a public awareness and take up of tax effective giving. The research echoed the findings of a Charities Aid Foundation study into tax effective giving awareness levels released earlier this year, in finding that just 35 per cent of higher rate tax payers did reclaim the higher rate of relief – but found that this 35 per cent accounted from 80 per cent of the total value of donations from this group.

Researchers surveyed 4,000 gift aid donors and conducted interviews with 12 major donors.

Early concern from sector bodies

Most sector representative bodies are considering their response to the report, but Charities Aid Foundation has already expressed tentative support for the composite rate option, but John Low, chief executive of CAF, said “I do however have a number concerns about this route.”

“A composite rate could add another layer of complexity if the system works in the same way as the current transitional relief, with charities having to claim money separately from different ‘pots’,” he said.

“Those organisations who have traditionally  had strong support from higher-rate tax payers may find that their income decreases as these donors adjust their donation levels.”

Low also expresses concern that a static composite rate could end up short-changing charities in the long term if the basic tax rate increases.

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Directory: HM Revenue & Customs (HMRC)
Who's Who: John Low