Osborne walking charities tightrope

by Calum Fuller

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18 Apr 2012

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IT IS FAIR TO SAY that the chancellor's proposed cap on charitable giving has failed to win him many friends.

Osborne has since backtracked on his original proposals - a cap on whichever is higher, 25% of a person's income or £50,000 - but insists he will not perform a U-turn.

It is, of course, a delicate balancing act. On the one hand, the exchequer needs to find a way of maximising the amount of tax collected from Britain's wealthiest residents - some of whom are paying just 20% income tax or less - while on the other, it needs to encourage philanthropy.

Charities inevitably screamed loudest when the suggestion of a cap was first made, while many commentators were sceptical of exactly how much revenue it would generate, which the government estimates at between £50m and £100m.

Indeed, the Charities Aid Foundation (CAF) found last week nine out of ten of its members believe the government's cap on tax relief will depress donations from major donors, while commentators criticised the measure for its untargeted nature.
As if that were not enough, the CAF also found almost two-thirds of Tory and Lib Dem backbenchers opposed to the move.

The first option is to have a separate limit on charitable giving at 50% of an individual's income, which could allow charities significantly more in reliefs than under the current plan. The second is to let donors roll over unused tax reliefs into following years, provided they are used for donations.

While these measures cut less deeply, it has not dampened the vociferous calls to abandon the cap.

Few would disagree with Treasury minister David Gauke's assessment that it is "not entirely fair...there are some very wealthy individuals who are essentially able to take themselves out of the income tax system", he said on the BBC's Today programme. But, for CAF's chief executive John Low "a blanket cap throws the baby out with the bath water".

"If there is evidence of abuse then by all means put appropriate measures in place," he adds.

That, however, raises the question of what are appropriate measures?
One popular alternative is a minimum tax imposed on top earners set at predetermined percentage of their income. Under this system, donations will not be targeted directly, and instead a minimum tax contribution would be made before reliefs apply.

This could eliminate the charities' pain at the point of receiving donations, but it may still have a chilling effect on the size of donations received - as it will cut in to the amount of disposable income available to donors.

The government is keen to point out its proposals are not dissimilar to the ones present in the US, which is notably pro-philanthropic, whilst still imposing a cap on tax reliefs.

The dearth of further suggestions is a cause for concern. Certainly, charities will fight their corner - and who can blame them? But, the current situation of potentially unlimited tax reliefs is highly unusual, and the problem of society's richest legitimately mitigating their tax liability will not go away.

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