This time last year, Lauren Scott reported that David Cameron had unveiled the Government White Paper which he intended would empower and encourage more people to get involved in charitable giving. However, the Government’s latest proposal would appear to have had the opposite effect.

The announcement came in the April 2012 Budget that, from next year, any donor giving more than £50,000 per year or 25% of their income, whichever is higher, will not be able to reclaim all the tax they have paid on their donations.  The cap would apply from 6 April 2013 and will only apply to those reliefs which are currently unlimited. Draft legislation will be published after the summer Consultation has taken place.

Now that the dust is beginning to settle, here at Morton Fraser we have been looking into the effect this could have on both charities and donors:-

The Proposed Cap on Tax Relief

At the crux of the matter, is the proposal to introduce legislation to cap income tax relief on giving. This is the latest in a long series of measures aimed at targeting tax avoidance, however the Government have been criticised for confusing the two issues and have claimed that philanthropy is not a form of tax avoidance. The damage caused to charities, which are already struggling through the recession, would be extreme when compared to the savings generated.

Some have argued that, while the policy seems unfair when viewed from the point of the charities, it may not be quite as unfair to the tax paying general public.  When a person donates, say, £18.00 to a charity, and if the donor pays standard rate or more of income tax, the government then pays £2.50 or more to the person’s chosen charity.  That additional £2.50 is borne by the tax payers. The problem with this argument, however, is that the general public seem to be manifestly against the proposal. The prevailing view is that, if the Government are to impose stricter tax conditions on the rich, this should not be at the expense of charities.

The Effect on Charities

The stance from the Third Sector is that the cap will have a devastating effect on charities’ income. Until the Consultation is complete it is unlikely that any decision will be finalised. Even speculation could cause difficulties for charities as philanthropists shy away from committing themselves to substantial sums. Another difficulty is that the wealthy tend to organise their charitable giving and tax planning accounts in advance so, where donors have promised that they will continue to fund, they may not be able to support at previous levels.

The future of major projects planned with the UK’s leading arts organisations and museums is now uncertain as the cap would have particularly serious implications on large projects which rely on £1million+ donations. These include popular and respected bodies such as Tate Modern and the British Museum.

Of the 11 billion pounds donated in the UK in 2009 and 2010, it is estimated that 45% came from 7% of donors. This highlights that, although the proposal will not affect the majority of people, it will have a devastating impact on the majority of donations.

What will the effect be on donors?

A donor earning £200,000 or less who gives anything over £40,000 could be affected by the cap, even if they claim no other tax relief. HMRC also confirmed that any gift aid claimed by the charity will be subtracted from the amount the donor claims under the cap. If a donor gave so much that gift aid was more than the total tax relief available, they would have to pay back the tax claimed by the charity.

A serious concern is that people will not only give less but may be put off donating altogether. If the changes do go ahead, then an option to donors is to give slightly less. Donors can help to avoid this by liaising with their advisors and by perhaps reducing the amount of giving, with the option to increase again when the Government’s plans become clearer.

Is there an alternative approach available to the Government?

Some have commented that there is little evidence of abuse in the current system and, where it exists, it should be tackled directly by punishing those involved, rather than implementing such a far-reaching overhaul.

Another alternative would be a system by which charities could reclaim all the tax paid by higher rate paying donors under gift aid, in the same way as they claim all the tax paid by a basic rate tax payer. The Institute of Fundraising (IOF) reported that 77% of its members who responded to a survey favoured this approach. It has been suggested that this would remove any possibility of tax avoidance and was put forward by the British Red Cross. The IOF is now seeking discussions with the Government over how this proposal could be implemented.

Regardless of the final outcome, it is essential that all options are considered and that a decision can be reached relatively quickly: any uncertainty and delay will only cause further difficulties for the Third Sector.

It is maintained by many that philanthropy does not exist for the purpose of tax avoidance; it is driven by a wish to improve society and to develop education and other opportunities throughout the country. Whether this is true or not, the question remains, is punishing charities really the best way to reduce tax avoidance?