Charity tax reforms could unlock a wave of giving

An independent commission has come up with a series of measures aimed at making giving to charities easier, decreasing spending on unnecessary admin and potentially increasing charity income by hundreds of millions per year.

The Charity Tax Commission, led by Sir Nicholas Montagu who was the former chairman of the Inland Revenue (now HMRC), found that charity tax relief is in much need of a radical overhaul.

Changes to the rules around Gift Aid – where HMRC adds 25p to every pound given – along with other reforms could incentivise giving and offer financial protection to charities and those who depend on them.

“The present system is entirely geared to analogue and we live in a digital world,” Sir Nick told Accountancy Age. It has been 20 years since charity tax reliefs were last reviewed, he explained. Since then, people increasingly give to charity using contactless or text message.

“The Charity Tax Commission’s recommendations could help bring the tax treatment for charitable giving into the 21st century and result in a huge increase in the amount of money available for good causes,” he said.

While he said the measures do come with a price tag, they should not involve “significant public spending or lost revenue”, and some are aimed at simplifying existing processes.

What’s on the table

• Gift Aid should be reformed, so that unless donors opt out, the value of additional and higher-rate tax reliefs (which reflect the 45% and 40% tax bands) should be directed to charities. This would be on top of the current 25% basic rate relief. Even if donations stayed stable, this could increase the amount charities receive per year by an extra £250m
• Launch a Universal Gift Aid Declaration Database (UGADD). This would be a single, enduring declaration which individuals could make to cover all their subsequent gifts to charities
• Payroll Giving schemes should be made mandatory. These are the schemes, also known as Workplace Giving or Give As You Earn, where employees can opt to give out of their pre-tax income. Uptake has increased with 5,500 employers offering such schemes and 1m employees using them. However, this option would mean the government would insist on employers offering this to staff, much as they have done with auto-enrolment (although this relates to money given by employees rather than employers)
• Simplify VAT – complicated rules surrounding VAT on facilities, equipment and buildings shared with other organisations mean many charities pay out money they cannot recover. Reviewing the rules could encourage cross-sector partnerships and help the UK increase R&D investment, aiding productivity and economic growth
• Remove VAT from wills that include a charitable donation. That would give solicitors a greater incentive to raise the possibility of whether someone would like to give a charitable gift in their will. It is estimated this could generate a further 15,000 charitable legacies per year
• Consult on business rates relief to wholly-owned trading subsidiaries – charities get 80% relief on non-domestic business rates, which can be topped up by up to a further 20 per cent by local authories. However, charities can lose this benefit if they set up trading subsidiaries in order to comply with rules on charity trading.
• Build public trust by improving openness – charities with annual revenue of over £1m should publish detailed information in their annual reports about the money they receive from tax reliefs.

Next steps

The Commission, which was convened by the National Council for Voluntary Organisations (NCVO) in 2017, will now wrap up and the measures will go out for consultation and be taken forward by NCVO and others.

Sir Nick said: “I hope charities will now keep the pressure up: we’ve got a blueprint, so let’s get on with it.”

While charitable tax breaks are worth a total of around £5bn a year, with the NCVO estimating that the public gave around £11.4bn to charity in 2016/2017, these are challenging times for charities particularly as government funding cannot be relied upon. There is £560m of Gift Aid going unclaimed every year, a figure which could be improved upon by cutting admin.

The proposals had the assistance of HMRC representatives, who “were always constructive, but provided us with sensible restraints,” said Sir Nick.

Longer term, the commission recommended a comprehensive review of VAT for charities, a review of business rates relief which make not reflect the realities of the digital era, and further research into Gift Aid.

• The Commissions’s final report can be found at www.ncvo.org.uk/tax