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Revelations about tax relief cap 'get worse and worse'

05 Apr 2012 News

The proposed cap on tax reliefs create a “huge disincentive” for anyone to give more than a quarter of their income to charity, and so is effectively a tax on giving, according to the vice-chair of Charity Tax Group.

Kevin Russell, vice chair of Charity Tax Group and technical director at Stewardship

The proposed cap on tax reliefs create a “huge disincentive” for anyone to give more than a quarter of their income to charity, and so is effectively a tax on giving, according to the vice-chair of Charity Tax Group.

Kevin Russell, who is also technical director at Christian donor advised fund Stewardship, says that the more detail that emerges about the policy, the worse it gets.

He said that one item of confusion that was cleared up by the clarification note published by the Treasury on Tuesday is that gifts above £40,000 will be potentially caught by the cap, rather than those above £50,000 as many in the sector had assumed.  This is because it is the gross gift that is subject to the cap, not the net gift.  

“So it’s actually slightly worse than we thought,” Russell said.

Penalty for giving more than 25 per cent of income

Something else that was not in the note but has emerged from discussions with HMRC is the fact that the cap will essentially penalise anyone who gives more than 25 per cent of their income to charity.

Russell explained: “Because the basic rate of tax that a charity claims is protected, the Revenue has said people can still give more than 25 per cent of their income, they just won’t get the tax relief for the excess.  But if they give a sum such that the amount of basic rate tax that the charity reclaims exceeds the total relief that they are permitted, under the cap, to claim, then not only will the relief be restricted but the donor will get a tax assessment from the Revenue and will have to pay up.

“In that sense it has become a tax on giving,” he said.

“So while the government in the clarification note states that ‘tax reliefs exist to support a range of policy objectives, promoting activities such as philanthropy’ – this policy doesn’t promote or support philanthropy at all, it’s actually a huge disincentive.

“It says ‘we want to encourage you to give up to 25 per cent of your income to charity but we don’t want to encourage you to give away any more’.  

“They also say in the note that they are going to ‘ensure this change does not significantly impact on charities which depend on large donations’.  I’m not sure how they are going to ensure that without making carve-outs that make a mockery of their policy intention.”

Small charities will be affected too

And it is not just large gifts that may be impacted, Russell warned. “If a donor gives, say, £5,000, or even £500, to a local charity under gift aid, that could still be subject to the cap if the donor is also giving substantial and numerous donations to other charities in the same year, such that overall the cap is exceeded. So, which donations will the donor cut out to stay within the cap? It may well be those small local ones which the donor is less committed to, as well as shaving back the major gifts.”

Russell also claimed the scheme fails to recognise that a lot of large donations go to donor advised funds like Charities Aid Foundation, Stewardship and community foundations, all of which make grants to small charities on the back of the gifts that they receive from major donors.  

“It may be that a number of small charities will close as a result of this policy.  I remain very concerned, I don’t think it’s good policy and it should be scrapped.”

CAF: Worst fears confirmed

John Low, chief executive of the Charities Aid Foundation, said: "We knew the tax changes would be bad, but this confirms our worst fears.  The Treasury talks as if Britain’s most generous charitable donors are simply tax avoiders.

“The government’s handling of this has been shambolic. Far from clarifying matters, it has created further confusion among charities and donors. That’s no way to fulfil its vision of a Big Society." 

Proposal ‘will reduce donations immediately’

Separately, David McHattie, head of charities at Barclays Corporate, warned that the uncertainly caused by the proposed cap is likely to disrupt donations this year even before the measure is actually implemented, and advised charities to take action immediately.

He said: “For those charities reliant on major donors the impact cannot be underestimated. 

“Charities need to start working closely with their major donors now, exploring their plans and understanding the likely effect on each donor individually if the legislation goes ahead, as some will be more impacted than others.   This can then be factored into budgets and forecasts for this year and beyond.”

Give It Back George campaign

Support for the Give It Back George campaign has snowballed since it was launched by NCVO and CAF two weeks ago.  At the time of publication it had attracted the backing of more than 1,850 organisations and individuals.

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