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Let donors escape tax relief cap by giving the relief to charity, says Red Cross

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Let donors escape tax relief cap by giving the relief to charity, says Red Cross10

Fundraising | Tania Mason | 18 Apr 2012

The British Red Cross has proposed a compromise over the tax relief cap: that donations only become subject to the cap if the taxpayer claims the relief for themselves, but not if they donate it to the charity.

This would have the effect of increasing the sums going to charities while also preventing the fraud and abuse that the government claims it wants to clamp down on.  

It would also help to level the playing field between higher-rate and standard-rate taxpayers, as currently 87 per cent of people are not higher-rate taxpayers and cannot claim back any tax for themselves on their generosity.

The Red Cross has written a position paper on the Budget proposal to cap tax reliefs on charitable donations for higher-rate taxpayers, and sent this to the Chancellor.  The paper states that the proposed measure is not only at odds with the government’s own announced agenda of increasing and facilitating philanthropy, but would reduce the charity’s ability to achieve its charitable objectives and reduce its help to people in a crisis.

It suggests that a simple solution: offering donors a choice of claiming back the tax themselves or letting the charity have it. It says:

“Donors who claim tax relief on charitable giving should have a choice on making their donation a further benefit to society.  We are proposing an opt-in/opt-out system which would increase the value for the charity of a donation from a higher-rate taxpayer. The donor choices would be:

1.    By opting out of the proposed cap, the relief would be claimed directly by the charity. 

2.    If donors want to claim the tax relief for themselves, the proposed cap would apply.”

The Red Cross suggests the system should be implemented by the donor making the declaration to the charity rather than to HMRC.  Director of fundraising Mark Astarita said: "We think the declaration is to the charity at any point of donating and collected by us just as today any advert or appeal asks the donor to tick the box so we can claim gift aid. We will need to add another box and wording. Special one-off forms may be devised for big donors to be given by the charity so we claim from HMRC the tax difference, not the donor."

The position paper provides examples of how this proposal would affect certain levels of donations.  One such example shows that if a higher-rate taxpayer makes a £1m donation and opts to give the tax relief to the charity, the gift becomes worth over £1.8m to the charity, a whole £568,000 more than it is currently worth.

The Red Cross states that according to HMRC, £360m was claimed back in 2011/12 by higher-rate taxpayers from gift aid and covenants.  However, not all that is available is claimed, suggesting that the amount that could be raised for charities could be even higher.

The charity has not yet had a response from the Chancellor.

Click here to read the full British Red Cross position paper.

Click here to read Mark Astarita's blog about the idea.

Clegg: We don't want to damage charities

Meanwhile, deputy PM Nick Clegg appeared to tell the Today programme this morning thatthe government would make concessions over the proposed cap.

He said: "Of course, as we said at the Budget, we will look at this in detail. We have got time to get the details right. We will look at this in the round and we will do so with an open mind and very sympathetically, because we don't want to damage charities. We don't want to inhibit philanthropy.

"But, the principle of saying that there should be some limit to what are taxpayer-funded allowances in the tax system as a whole is something which is sensible." 

Rachel Hudson
Head of Development
Shakespeare Birthplace Trust
19 Apr 2012

I'd love to see this work - but can anyone tell me how the higher rate relief would find its way to the right charities if the only way of implementing it is via a single tick box on a self assessment return?

Mark Astarita
Director Fundraising
British Red Cross
19 Apr 2012
Response to [Rachel Hudson]

Couple of quick responses.

First I have had so many kind comments of support and some from the most surprising places. So thank you for those.

While the mechanic is boring I urge you all to get behind the principle first the rest will follow i.e suport the relief following the donation.

I think tick boxes on self assesment forms is naff and has already been scapped. My tick box is to us the charity just like all of us do already on gift aid forms adapted for this new scheme so we all claim the relief and the donor never sees it.

Will it lead to more... you bet it will millions of £'s more going to good causes, because many do not claim now and not everyone is a millionaire but 13% of us do pay HRT. Remember it kicks in at 36k these days.

Most people give exactly £100 or £100000 cos that is what we ask for they don't all sit down with a calculator working it out. Some will and that is fine but some won't.

People give to change the world not get a tax break. If their gift could be even more under this scheme who would not jump at that chance!

Ian Theodoreson
Chair
Charity Finance Group
18 Apr 2012

Sounds like a neat solution except that the donor who is calculating the net level of income they wish to retain at the end of the giving process will simply pare back the amount of the gift in order to end up with the same level of net disposable income as they would have had originally.

In the example given, by ticking the box and opting out of getting higher rate relief the donor is in effect paying across the gross value of the gift out of their pocket - £1m direct to the charity and a further £818k to the charity via the tax they pay to HMRC. The charity benefits for sure, but the donor ends up with less in their pocket by way of post tax, post donation income than at present, and the only logical way for the donor to compensate for that net reduction is to reduce the level of donation given in the first place.

It is a zero sum game with no new money on the table. There is no clever solution that gets away from the truth that whereas previous governments have thought it a good idea to encourage philanthropy among the wealthier members of society (in the same way that most western governments do) the current government it seems have changed their mind. Whether this was done conciously or by default, history has yet to reveal, but it says something quite worrying when governments start to equate charitable giving with tax avoidance.

Adrian Beney
Partner
More Partnership
18 Apr 2012

Some will not be surprised to hear me say I beg to differ. I think the principle is a good one but I think the implementation will be complicated. It requires the donor to know, at the point they make their gift, which tax band they expect to be in that year, and it requires the donor to give that information to the charity.

In many cases they will not have the first piece of information, and even if they did then they will not necessarily feel comfortable telling the charity. Sure, the tax relief would be an incentive to do so, but if they don't have the information, then they can't.

And in any case the net result is the same as is currently. If the tax relief is changed to the Red Cross rules, then in the example above the donor is pretty unlikely simply to give the £1m to charity, because the net cost to them would be higher, by £375,000.

Under the existing rules (at 50% tax) if they gave the £1m the charity would end up with £1.25m and the donor's tax relief would take the cost down to £625,000.

Under the Red Cross proposal, the donor is much more likely just to give £625,000 and the charity would get the tax relief, taking its gift up to the same £1.25m So the overall amount received by the charity would remain the same.

So the proposal does not result in extra income for the charity, and still requires the government to row back on the tax cap, and requires a new and more complex method of doing Gift Aid.

I don't see where it gets us, other than adding in a further layer of complexity to a debate which should be about getting the government to exempt charities from the cap in its entirety, and about getting charities to be more assertive about the public benefit they provide.

Greg Aitken
CEO
Hull & East Yorkshire Mind
18 Apr 2012

Once again it takes the voluntary sector to start talking about the solution rather than the problem. But we should not be surprised we have had to do this with successive government. Are we getting too good at it as governments seem to create problems for society rather than find solutions?

Barry Gower
GAIN (Gift Aid Recovery Consultants
18 Apr 2012

Well said all. I however would like to suggest an alternative approach.

Revisit the ‘Spirit of Dunkirk'. Enlist the help of all the accountants, tax consultants and financial advisors, and let them continue to do what they do best and get the maximum relief for their clients. Then, as part of their contract with the client, get the client to agree to pay some, or preferable all of their tax relief, to a charity of their choice. The accountant will be providing a service which will meet their own CSR obligations (a bit like a PGA although they will not make any additional charge for this service), the client will be making additional donations, probably without even feeling it ( what you have never had you won’t miss) and neither party will have to pester the other for sponsorships and/or to undertake gruelling bicycle rides in China. The cap can disappear, as the financial intermediary will be providing a check to ensure that the money is being channelled legally, and the objectives of all parties will have been met with a minimum amount of effort and no change in legislation.


Peter Maple
Course Director MSc Management in Civil Society (Marketing and Fundraising)
LSBU
18 Apr 2012

This is, of course, a twist what the Institute of Fundraising have been advocating as a "composite" rate to capture gift aid on all donations which the Treasury didn't like as it could be perceived as straightforward government "matched" funding.

It is an elegant twist which I suspect many major gift fundraisers have used to persuade the givers to up the value of the gift. In fact it would be much simpler to make both parts of the gift aid directly recoverable by the charity.

In the same way as a giver usually ticks the "I pay sufficient UK tax" box a high value giver would tick a supplementary box, "I pay sufficient higher rate UK tax" Simples.

Mike Wade
Director of Fundraising and Communications
NDCS
18 Apr 2012

Fully support this - I have proposed the same approach as well. It seems the obvious solution to the government's concern about higher rate tax payers not paying enough tax.

Is this a proposal the whole sector can get behind?

Ben Banks
SHARE Community
18 Apr 2012

So glad that Mark has stated the case for this. I was thinking the answer to this was surely simple - let the charities have the tax relief, so I'm glad that someone with a lot more gravitas thinks the same. Let's hope that simple solutions don't get overlooked and that the Government turns its thinking around.

Andrew Scadding
Director
Thai Children's Trust
18 Apr 2012

A simple and elegant solution which would answer the needs of charities and donors, and gives the government an honourable exit from its woes, at least this particular one.

Like so many people, Mr Osborne should be very grateful to the Red Cross for its timely and effective assistance.

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