“There is no real excuse” for the government not to pursue these measures, was the declaration of Sir Nicholas Montagu, chair of the NCVO’s charity tax commission, at the report launch yesterday.
As Montagu suggests, realism is the guiding force of the Reforming Charity Taxation report. The commission members have worked under the principle of “fiscal neutrality”, meaning that none of its suggestions will result in a net deficit to the taxpayer. This has frustrated some in the sector whose less neutral suggestions have been overlooked, as Montagu noted in his speech, but the hope is that working under such limitations means the, currently distracted, government will be less likely to throw the report on the “too difficult” pile.
Indeed, one of the report’s recommendations is similar to one already put forward by the Treasury earlier this year. At the Charity Tax Group’s annual conference in April, Robert Jenrick, exchequer secretary to the Treasury, called for “all charities, led by the largest ones, to publicly report the amount of Gift Aid they receive”.
The report goes a step further and suggests that charities with annual revenue of over £1m should be required to publish detailed information in their annual reports about the money they receive from Gift Aid and business rates tax reliefs. The reasoning given by both Jenrick and the commission for this proposal is to increase transparency and help build public trust in charities. If this comes to fruition, it will be interesting to see whether the newly-published figures help to dispel myths or just offer charity critics a new stick with which to beat the sector.
Despite the restrictions, the proposals in the report are estimated to boost the sector’s income by hundreds of millions of pounds, if they were to be implemented by the government.
One of the headline recommendations is to reform the way that higher and additional-rate relief operates. The report suggests that higher-rate tax paying donors should automatically pass their tax relief onto the charities they donate to rather than having to opt in. It estimates that this reform could potentially raise £250m more for charities every year.
Another suggestion from the report is for all donors to be able to sign up just once to a central database confirming that they are happy for all their donations to be eligible for Gift Aid. Operating like the NHS Organ Donor Card, a universal Gift Aid declaration database would remove the requirement for eligible donors to register every donation they make. While such a scheme has previously been discussed by government, the report says it is now even more necessary as donations are increasingly made digitally and on-the-move.
The report suggests removing VAT from wills that include a charitable donation, which it estimates could lead to a further 15,000 charitable legacies a year due to solicitors being more likely to suggest charitable donations to clients when writing wills.
And the report recommends that the government force all employers to offer payroll giving schemes to their staff, as they have done with pension auto-enrolment.
Less headline-grabbing proposals, but ones which will gain approval from many in the sector, are those to simplify VAT rules for charities. The report calls for public bodies to tell charities what the VAT status is of any funding through grants and contracts they offer them. It says this could save many charities significant resources trying to figure this out for themselves. The report also calls for VAT rules on facilities, equipment and buildings shared with other organisations, which currently mean many charities pay out money they cannot recover, to be simplified.
It also suggests the government consults on extending business rates relief to wholly-owned trading subsidiaries. Commission member Pesh Framjee, partner and head of not-for-profits at Crowe, took this suggestion a step further in a recent report to remove the requirement entirely for charities to set up trading subsidiaries in order to gain tax reliefs.
The wrong trousers?
Charities have generally responded positively to the report’s proposals. The Charity Finance Group particularly welcomed the report’s suggestions to help boost the sector’s income while Remember a Charity backed the proposal to remove VAT from legacies.
The Charities Aid Foundation similarly praised the suggested measures to boost Gift Aid claims and increase payroll giving. However, it urged caution over the suggestion to automatically divert higher-rate taxpayer’s relief to the charities they donate to because “people’s tax affairs are rightly private” and such a scheme could “undermine the relationship between charities and their supporters”.
As previously mentioned, there remain some criticisms that the report does not go far enough in attempts to redress a tax system that many charities deem not fit for purpose.
The Charity Tax Group (CTG) was most forthright in expressing this view, saying in its response: “We were disappointed that the Commission felt it had to limit itself to fiscally-neutral proposals as moving money from one pocket to another in the same pair of trousers when you have outgrown the trousers is a problem still to be resolved.”
CTG said that freeing charities from some of the tax burdens that they face would “more than outweigh” any additional cost of reliefs as any “additional money released would be invested in providing additional facilities and services”. This may well be the case but it is less likely to convince a government that is particularly cautious to loosen its purse strings.
Will the government listen?
The government gave nothing away in its typically neutral response to the report’s proposals: “We constantly keep tax reliefs under review but have no plans to make changes at this time.”
At the report’s launch, the NCVO staff, who will be lobbying for the recommendations to be adopted, suggested that the Treasury select committee might be the most fruitful way to draw MPs’ attention to the report in the short-term. This could be a wise move as the government might be more inclined to act if the committee adds its influential voice to those of the report authors.
Parliament looks to remain hamstrung by Brexit discussions for the foreseeable future, whether the UK leaves the EU or not by the end of October. However, a new prime minister will be in place next week, desperate to announce something positive to make a good impression on a general public that did not elect him. With zero resources at his disposal, the suggestions in this report could offer ideas for the inexpensive good news story he needs.