The UK government recently announced that it would cap tax relief on charitable giving. The surprise move has met a furious response, and makes no sense whichever way it’s intended. It’s a shame, because the charitable world has plenty of real battles actually worth fighting.
The detail. The government is capping the total amount of tax exemption which any individual can claim, at £50k or 25% of income whichever is the greater. Fair enough to clamp down on tax avoidance schemes, but the issue is whether charitable giving constitutes tax avoidance.
The fact is that we don’t the government’s logic – it’s not explained it clearly. Below are all the hypotheses I’ve constructed and heard – and why they’re all bonkers.
Philanthropy is a tax avoidance device. Well it’s not a very good one, since it costs the donor money. If I donate £100k, the tax payer adds £66k, but I’m still £100k worse off than I would have been otherwise. The tax system provides a discount for giving: not an incentive, as such, so it’s hard to imagine anybody who’s in command of the maths giving to a bona fide charity in order to save themselves money.
‘These austere times’. Obvious HM Exchequer is empty, but if the Chancellor’s concern is raising tax revenue, surely dropping the 50p tax rate is rather curious. Added to which is the fact that much of charities’ work saves the government money, and the donations which the cap may scare away greatly exceed the revenue which the Exchequer would save.
‘We can spend your money better than you can.’ Perhaps the government dislikes the tax-payer subsidizing individuals’ charitable giving because it thinks that government does a better job of spending money. That’s a left-wing position – which, though defensible, nobody made in the Labour years, when tax-subsidy grew – and an astonishing view for a Conservative administration.
It would be particularly bizarre for an administration whose central tenet is moving responsibilities away from the central state through localism and ‘the Big Society’.
Out of control. It is said that HMRC dislikes forsaking money to organizations which it can’t control. Again, this conflicts with decentralization: it doesn’t control local authorities, or the Greater London Assembly, and the government’s agenda will soon cede more power to cities and elected police chiefs.
There is a serious point here that donors are answerable to nobody, and yet the money they spend is partly the tax-payers. Perhaps half of the money in endowed foundations belongs to the tax-payer, whose ability to influence or object is precisely zero. This should not be acceptable: it’s like taxation without representation. Only one* of the many foundations in the land allows the public to even see its meetings (the City Bridge Trust: hardly new, it was founded in the year 1209), but even there, HM Taxpayer has no say.
If the government wanted to force more transparency and accountability in foundations, it could, but this tax vehicle will not achieve it.
Johnny Foreigner. Perhaps the government was spooked by an EU ruling that UK taxpayers can reclaim UK tax on donations to charities in other EU countries. It certainly is weird that UK taxpayers should subsidise organizations in, say, Portugal. But the government denies that this is the reason.
If that were the problems, there’s an easier solution. UK charities pay VAT – about a £1bn of which they can’t reclaim (big scandal which nobody knows about). The UK government could cancel ALL tax reliefs for donors (which are ~£1b/year), and instead spare UK charities from VAT. That would solve the foreigner problem and be roughly cost-neutral all round.
No donkeys please. ANY charity gets tax breaks. And the set of charities includes some which probably aren’t priorities for most tax-payers: donkey sanctuaries (in the UK and abroad), dogs homes, the opera, Eton…
If that is Chancellor’s objection, he should say so. And then he should fix it – by initiating a national debate about which causes should get tax relief and which shouldn’t. There’s a review of charity law underway, so he can get that to consider it. But the sledgehammer he’s chosen will miss that target.
‘Some donors are giving to charities which don’t do much charitable work’ said the Chancellor this week. Correct: some charities are rubbish, just as some doctors are rubbish, some teachers, some golfers. But that’s not a reason to punish them all in this way.
There are two reasons that charities might not be much good:
1. Fraud. Sure, some charities are fraudulent. If that’s the concern, then beef up the Charity Commission*, or fire it. Fraud in a few is not a reason to choke off revenue from the many.
2. Quality. For sure, there is a quality problem in the charity world. Health is closely analogous to charities – both industries ‘do things’ to other people, often without those people’s consent or full grasp of their situation. In the health world, there are three rather good quality assurance mechanisms. None of these is mirrored in the charity world.
First, all health treatments have to go through rigorous, public and independent scrutiny before they can be administered (i.e., the peer review system). Charities have no such thing. Most ‘impact reporting’ is by the charity itself, so it’s hardly independent, and it’s anyway voluntary and hence patchy. The international development community is rather better than the domestic charity sector – they have randomised control trials, and systematic reviews and write in peer reviewed papers – but even there it’s voluntary.
Second, public money is spent on treatments only when they’ve been approved by the National Institute of Clinical Excellence. All other public spending is subject to ‘value for money’ analyses by the National Audit Office. The charity world has no such thing. Simply registering as a charity – which only means abiding within very broad areas – is sufficient to get tax-payers’ money.
And third, health professionals are all highly trained. They also belong to professional bodies, who can strike them off. By stark contrast, any old body can set up a charity, run a foundation, even advise major donors, on the basis of zero qualifications. It’s like the wild west.
All of these quality assurance mechanisms could be introduced by the government – and should, I’d argue. None is achieved by the tax cap.
So what do we conclude? That the Chancellor is mad?
Jill Rutter at the Institute of Government, says that the charity tax raid, along with the pasty tax, granny tax, and other tax debacles, arises from a fundamental brokenness in our tax policy system: tax policy is bound to fail because, uniquely amongst policy, it’s devised by The Quad (PM, Deputy PM, Chancellor, and Chief Secretary) in isolation with no outside consultation or discussion. Like much philanthropy, in fact.
*to my knowledge
**There are in fact three charity regulators in the UK, contrary to popular wisdom. The Charity Commission does England & Wales; there’s also the Office of the Scottish Charity Regulator, and the the Charity Commission for Northern Ireland.