Saturday, 14 April 2012

The charity tax grab

In the last few days, there has been a growing furore over the Government's plans to cap the amount of money an individual can give to charity free of tax. The amount of misinformation and misunderstanding around this is extraordinary and there have been some very silly comments from both supporters and opponents of the proposal.


I am no expert on tax, so for those who want to know how tax relief on charitable giving works, here is an excellent explanation by Andrew Brooks of SB Consulting. But let's be clear about what the Government's proposal is NOT.


Despite what is promoted and widely believed, it is NOT an additional tax on the rich. It is a tax on charities, particularly those that receive large single donations. Universities and the arts are particularly dependent on this form of philanthropic support, and there is a lot of concern from people in these sectors that funding will diminish as donations are taxed and government will not plug the gap.  Let me explain how it will work.


The proposed cap limits the proportion of annual income that an individual can give to charity to 25% or £50,000, whichever is larger. Below this limit donations can be made tax-free. This effectively means that the donor is "relieved" of their tax liability on donations made to charity. The Government's proposals DO NOT change this.


Above 25% or £50,000, ALL tax relief is withdrawn. This in effect means that charitable donations in excess of the cap will incur income tax at the donor's highest rate, probably 45p (or 50p in the current tax year).


To give an example: suppose an individual who earns £4m wants to give £2m to charity. At present he can give all of that £2m to the charity, declare the donation on his tax return and receive tax relief at his highest rate on that donation. In effect he has reduced his taxable income from £4m to £2m.


Once the cap is in place, the individual will still receive tax relief on £1m of the donation. But the remaining £1m will be taxed at his highest rate. Now, it is possible that our philanthropic donor will still give £2m even though half of that is taxed at 45p in the £. But it is much more likely that our donor will reduce the amount given to charity by £0.45m, to accommodate the tax that he will have to pay on that donation and leave him paying the same amount overall.


So the effect is that income to charities from single large donations will be partly subject to top-rate income tax. In effect, for the first time charities are being taxed - and at a pretty steep rate, too.


Not everyone is opposed to this. In a letter in the Guardian today supporting the proposed cap, representatives of the Tax Justice Network (TJN) and Jubilee Debt Campaign (JDC) make this statement:


"A decent society should not have to depend on the largesse of the super-rich for its public services, cultural life or anti-poverty drive."


And they go on to say:


"Tax exemptions for the super-rich have helped foster inequality. The removal of such exemptions must form a small part of a wider quest for tax justice which would allow governments everywhere to provide public and cultural goods accountable to their societies." 


It would seem that our TJN & JDC friends don't really want people to give to charity at all. They want all giving to go to the state and all services to be provided by the state. Well, they are entitled to their opinions, but this looks a bit extreme to me - and perhaps more importantly, is completely at variance with the will of Parliament over a long time now, which has sought to encourage charitable giving by means of a system of tax reliefs. 


But quite apart from their extreme statist views, our TJN & JDC friends also don't seem to understand basic maths. The proposed cap aims to raise additional tax revenues to pay for EXISTING government spending - not for Government to take over the provision of services currently provided by charities. If Government were to take over the provision of those services because charities no longer had the income to provide them, the money raised through the taxation of donations would still go into the provision of the SAME services - just provided by the public sector instead of the not-for-profit sector. There would be no net financial benefit to the Government at all, no more money for existing spending commitments. So the assumption must be that if taxation of charitable donations means that charities are no longer able to provide services that they do at the moment, those services will NOT be provided by Government - they will simply disappear, and society will be the poorer for their absence. Interestingly, a member of the governing council of the Royal College of Music (my alma mater) makes exactly that point in another letter on the same page in the Guardian.


The nastiest part of this whole shambles, to my mind, is the public depiction of large-donation givers as "tax avoiders". I find this really quite unpleasant. Firstly, these people are GIVING MONEY AWAY. Yes, they don't pay tax on the money they give away. But does that mean they are giving the money away simply in order to avoid tax? That really doesn't seem very likely. If the donation is to a bona fide charity, they do not benefit from that money at all - even the tax relief doesn't benefit them, since it simply allows more of their donation to go to the charity. Secondly, the tax relief on charitable donations was DELIBERATELY CREATED by Parliament to encourage charitable giving. If someone uses a relief for the purpose for which it is intended, it is NOT tax avoidance - it is tax compliance. So, if our philanthropic donor gives £2m to a bona fide charity free of tax, he is not "avoiding tax": the relief that he claims is designed for that purpose. Parliament has the right to remove the relief, of course, but for politicians to describe as "tax avoiders" people who use reliefs for the purpose for which they were intended is wrong, unfair and looks very much like playing to the gallery. Tax avoidance by the rich is a VERY fashionable subject at the moment. 


There is widespread public perception that many of the charitable donations that will be subject to this tax are to "spurious charities". The Prime Minister claimed, as justification for the proposed cap, that many charities "didn't do much charitable work". But this claim has yet to be substantiated in fact and has come in for serious criticism from the Charity Commission and HMRC, who have stated that they are not aware of any such cases. And the head of the National Council for Voluntary Organisations (NCVO), Sir Stephen Bubb, has publicly called for the Government to provide evidence of such behaviour so that the charities concerned can be closed down. There has also been criticism of large donations to overseas (especially European) charities: but we are part of the European Union and charities based anywhere in the EU can legally operate here and receive tax-free donations from UK residents. 


So in short, this is a Government raid on charities dressed up as an attack on tax avoiders. It's slimy, underhand - and completely counterproductive. Attacking charities is NOT a clever strategy for a Tory government. Because many of the people who make large donations to charity are Conservative party supporters, and many of the charities receiving those donations are run by Conservative party supporters. Encouraging private (including charitable) provision of services instead of state provision has been a hallmark of Tory party policy for a very long time. By targeting charities, the Government is upsetting its supporters and undermining its own party policy.  


Personally I do think that tax relief on charity donations needs to be rationalised. The present situation is that under gift aid, charities can claim back from Government the basic rate tax deemed to have been paid on the donation, which gives them an additional 20% on top of each donation. If the donor is a higher-rate payer, though, and declares the donation on his tax return, he receives tax relief at his highest rate even though the charity can only claim basic rate. If charities can only claim basic rate tax under gift aid, then in my view tax relief should also be restricted to basic rate for gift aid donations. And there could be a case for restricting all tax relief on charitable donations to basic rate, or even for eliminating tax relief completely - no doubt our TJN friends would like that.  But leaving higher-rate relief in place then abruptly withdrawing ALL tax relief at £50,000 or 25% of income strikes me as folly. My example above assumed that my donor didn't change his giving behaviour as a result of this bear trap, but people don't like traps - they generally avoid them. I would therefore expect there to be significant changes in donor behaviour, such as keeping donations just below the tax level and perhaps finding other, more tax-efficient ways of using their money. The income loss to charities could turn out to be far more than the tax actually suffered. 


And this is not the only charity tax grab. In the first letter on that page in the Guardian, the Chief Executive of the Arvon Foundation points out that the Government plans to remove the VAT exemption for alterations to listed buildings. Charities that renovate and maintain listed buildings, therefore, will now suffer tax on their work - even if it is funded by Government grants. This seems idiotic. Really the Government hasn't thought this through at all.


It looks to me as if the Government has no real strategy for increasing tax take and reforming taxation, but is simply snatching at straws - schemes it thinks will be popular with voters and give the impression that they are doing something significant. The Chief Executive of the Arvon Trust, in the letter to the Guardian that I have already quoted, bewails the lack of "joined-up thinking" in the Government's tax policies. She is absolutely correct - it is piecemeal, inconsistent and unfair. Osborne is the most "political" Chancellor we have had for a long time, and in my previous post on the budget I suggested that the driving force behind other tax changes was the 2015 election. But if that was his intention with the charity tax grab, I fear he has lost his political marbles.  
















17 comments:

  1. I was looking forward to this post following your tweet that you found the TJN Guardian letter "nonsense" as I wanted to hear what a sensible and informed person's problems were with the tax cap.

    I am still none the wiser though about how it is possible to defend tax monies from the public purse being used to support the charitable donations of individuals.

    Using your example of the £4m donation. Sure, the donor doesn't benefit financially from the donation (except possibly to enhance social life and knighthood for charitable works) but the Exchequer is £2m the poorer.

    The elected government sets out a budget of required public spending and sets taxes to raise said amount (bar the odd £150bn shortfall).

    How can it possibly be right that a rich individual then comes along and effectively says, I don't want my £2m tax this year going to the NHS, welfare, education and policing but I'd rather it went to boost my contribution to the medical charity I have opened in my parents' or spouse's name.

    I just fail to see why not having their donations grossed up by the Exchequer should impact at all on what individual donors donate. They still donate the same net sum. Yes, the charity gets less but then I don't believe charities should be favoured above other public expenditure.

    And if one thinks that the RCM deserves monies more than Trident (which I'm sure many do) then shouldn't this be decided through the ballot box and not through individual whim.

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    1. Excellent points! You have hit the nail on the head

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  2. Shinsei,

    I did explain why TJN's remarks were nonsense in relation to this particular proposal. The purpose of the cap is to raise tax revenue to help the Government meet existing spending commitments. TJN's remarks suggest that they expect the Government to assume the responsibility of providing services currently provided by charities. If the Government does this then the cap will raise NOTHING. That's why TJN's remarks were nonsense in relation to THIS PARTICULAR proposal.

    I also commented in the post that there could be a case for removing higher-rate relief on donations, or even ending tax relief on donations completely. However, the cap only withdraws tax relief from the very rich and doesn't address the fundamental issue of whether charitable donations should receive tax relief at all. I therefore did not address that subject in this post.

    But you are illogical in your focus on rich people. You ignore the fact that because tax relief applies to basic rate tax, ANYONE, of any income level, effectively decides how their tax is spent when they make a charitable donation. It is not a right of rich people that others don't have.

    I also pointed out that the view of Parliament over a long time now has been that they wish to encourage charitable giving through tax relief. Parliament itself therefore prefers individuals (of any income level) to be able to decide, to some extent, the way in which their taxes are spent. Parliament can change this, of course, but so far has not chosen to do so. Tax relief on charitable giving therefore IS mandated through the ballot box.

    All I am doing in this post is pointing out the problems with picking on one group of people in the hope of raising a fast buck and NOT addressing these fundamental (moral) questions.

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  3. There is alot that one can say on this topic. The following are a few immediate points:
    1. the cap is due to apply from April 2013 so those making donations over the cap are most likely to be paying 45% tax on the income concerned.
    2. It is not clear how companies will be treated. It looks as if as long as the income can be captured in a company then gift aid may still be available. this may offer a solution in certain cases.
    3. There is a lack of understanding of the way gift aid works and I don't think any reform is required.
    Historically, gifting to charity was a charge on income ie a deduction from income. The individual chose to divert the income to the charity so that it was as if the income was never received and so no tax was due.
    With self-assessment such an approach is practically difficult to administer. So the HMRC traditional form 930 approach was adopted for gift aid in the same way that personal pensions work.
    It works by deeming the contribution to be made net of basic rate tax. That way there is no need for HMRC to be involved unless a higher rate taxpayer or a non-taxpayer makes the gift. This simplifies administration and has no purpose other than that.
    as the contribution is deemed to be made net of basic rate tax then the charity can recover that tax ie contribution * 20/80.
    The practical workings of gift aid are a complete red herring. The system is purely designed to avoid everyone making a gift having to reclaim tax from HMRC.
    4. There is nothing in this proposal that wasn't obvious on Budget Day. I recorded the following podcast at about 4pm on 21 March http://audioboo.fm/boos/721423-budget-2012-john-endacott-tycoon-tax It is referred to as Tycoon Tax as that is where the policy comes from. This is Nick Clegg's policy. Presumably he understood the implications. They are obvious.
    5. It is very common for us to discuss giving to charity where clients have large unexpected tax bills. Individuals will give more to charity where they are exposed to a high rate of tax. Just like they make larger pension contributions or make EIS/VCT investments etc. All of these are things done by those with high incomes.
    6. A particular problem at the moment is reconciling the gift aid cap with the 36% inheritance tax rate where 10% of an estate goes to charity. I don't see why the rest of an estate should be more lightly taxed because some of the estate goes to charity. It is very odd but what is odder is how you reconcile it with this policy. Large gift in estate and tax benefit for other recipients. Large gift in lifetime and no tax relief. Utterly bizarre.
    7. In an effort to explain this the media keep describing it as a £50K or 25% of income cap on charitable giving. This is not correct. The cap applies to interest relief and losses as well. So an individual with a £190k salary can give £50k to charity but an individual with a salary of £200k and a loss of £10k (net £190k) can only give £40k to charity. Thats unfair.
    8. I could go on for hours on this silly scheme but to sum up - an individual lives off an income of £50k every year. He has an exceptional income of £200k as a one-off in one year. The individual doesn't want (or need) the extra £150k so they give it to charity. Suddenly this is "morally repugnant" tax avoidance. Why is this wrong? It used to be called Christian!

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  4. I know this wasn't the point of the post, but I am coming round to abolishing tax relief on charitable donations. 1 it makes tax simpler. 2 much as we would all like our taxes to go to our pet projects, that doesn't work overal. 3 it encourages the manic tax avoiders who will do anything to avoid tax.

    Last point might not be my best - might be better for such just to give their money away rather than invest in lunatic things just for tax reasons.

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  5. I enjoyed reading your post - thank you for writing it.

    There do seem to be two camps developing: one that says the existing system encourages donations to charities and should be largely left alone, and one that says wealthy donors should actually be giving all this money uncomplainingly to the government instead.

    I do fall into the former, but I think there are a number of arguments for retaining the relief that haven't been made.

    Foremost amongst these is the idea from the latter camp that wealthy donors will simply shrug their shoulders, and replace their charitable donations with tax payments to the Treasury. That argument, in my opinion, completely fails to understand human nature and is lacking in pragmatism.

    In general, people simply do not like paying tax - there is the compulsion element, and the lack of control element. Of course government provides useful services. But it is also prone to spending that can be seen as daft or wasteful. One example that got my goat was the speaker spending £30k on a coat of arms and a portrait for himself. I see that as indefensible.

    Contrast that with giving to a charity; donors can require charities to fund specific projects, and can see very direct results for their donation. It is not the case that all donors will require recognition, though of course for some donors, they will enjoy the recognition. An ego trip, if you want to be crude.

    Ignore for a moment the idea that charitable giving helps to 'avoid' tax. Removing the relief makes donations more expensive. Whilst I'm not sure that we can say there is a demand and price elasticity for donations, the likelihood would seem to be that donations will go down.

    That does _not_ mean that tax receipts will go up. Wealthy donors don't earn money or pay PAYE tax in the same way as us wage slaves - they are far more likely to be able to control their income through, for example, dividends from companies that own their businesses. With the relief gone, a donor could simply leave cash in a company, and the gain to the Treasury is nil (copyright: Ken Livingstone).

    As John's comment above notes, donations paid directly from a company may well still be able to relieve profits chargeable to corporation tax. This will be at a lower rate (20 odd % rather than 45%) but there does not appear to be an upper limit to that.

    Allowing the existing tax relief means that wealthy donors give money to charity, which is by definition for the public benefit. It's better to have that than have nothing.

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    1. Chrissington, I agree to a point. Yes, govt expenditure can be wasteful, but the example
      you give is trivial .

      More often, there is genuine and principled disagreement over what govts should be spending on. That, in my opinion, is for the ballot box to resolve, not a matter of opt out.

      And yes, the feeling of control is significant, but I suggest often misguided. People feel safer driving themselves than being on a plane/coach/train but they're not. (A friend does not drive because of the risk of "other morons" but is happy to ride a horse.)

      Not sure where this leads, but personally I am coming round to "render unto Ceasar what is Caesar's."

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  6. It will be interesting to see what Cameron's response is to this but the most shocking thing to me was Osbornes claim to be shocked at how people were avoiding paying tax. Is he completeley stupid? Why did his parents pay so much for an expensive education if he doesn't understand this. Surely someone who is in charge of the nation's finances - and was shadow chancellor for some time - would have done his homework and if he hadn't then he could have asked fellow Bullingdon Club members or even his own family.

    Are we not trying to encourage entrepreneurs? Such people are very effective at organising and running businesses and this skill is sorely needed by charities. Giving it to the taxman is often not the best solution.

    This seems to be a cheap way of policing tax avoidance and like so many of Cameron's policies, ill-thought out. Instead you could define a minimum residual that can be left after giving to charity - say £1million - because surely people can live on that. And just check with the charities commission that any large donors are not benefitting from their donation, even though they may become trustees.

    Wealthy individuals who want to give to charity, if they cannot do via a company as has been suggested, will just emigrate and do so from the US for example. In which case the beneficiary is less likely to be a UK charity.

    If Bill Gates wanted to set up his charitible foundation, would this have been worth while in the UK? Whether it is the RCM, universities, medical charities or any other the solution is to ensure that the charity is a genuine charity and not a scam.

    Shame on Cameron/Clegg/Osborne and all the apologists.

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  7. Entrepreneurs? If you really starting up your own business, not doing a venture capital pretence of starting a business and getting carry trade tax relief, do you know or care what capital gains tax will be in 20 years when you sell your business? Did gates or jobs know or care what cgt was when they starrted Microsoft or apple? I'd like to know.

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  8. Replies
    1. http://cityboykan.blogspot.co.uk/

      For the avoidance of doubt, I have added an appendix to this blog to demonstrate how the charitable donations of higher and top rate taxpayers are disproportionately and over-generously subsidised. I argue, because of the deleterious effect these enlarged subsidies have on public finances, that government subsidies given on donations from higher and top rate taxpayers should be restricted to the basic rate of income tax.

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  9. The Current Scheme
    At the current 50% top tax rate, a donation of £2m from an income of £4m yields the government £1.0m, the charity £2.0m and permits the donor to keep £1.0m.

    Donation Limit
    Under this scheme, assuming the donor wished to maintain their retained income at £1.0m, the charity's income would fall by £0.5m and the government's take would increase by £0.5m

    Restricting Relief to Basic Rate Tax
    Under this scheme, again, assuming the donor will wish to preserve their retained income at £1m, the charity's income will fall by a further £0.25m and the government's take will rise by further £0.25m.

    So for government revenues, the best scheme is the one that restricts tax relief to the basic rate. Because the schemes are zero sum, this is the worse scheme from the charity's viewpoint.

    The next best scheme for the government is to limit the donation to 25% of the donor's income.

    The worst scheme for the government is the current one. This is also the best scheme for the donor's nominated charity.

    So which of the schemes should be favoured? Clearly, this is a political choice - there are no absolute rights and wrongs.

    The TJN puts forward powerful and valid arguments for its position. Further, a visit to the Eton College website and its financial statements may cause taxpayers to wonder why their taxes are subsidising the education of the wealthy.

    It's your choice!

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  10. Painting with Numbers

    Yes, that's a good analysis of the options. As you say, the schemes are zero-sum for the charity and government, so increased revenue to government means reduced revenue to charities (assuming no increase in charitable giving, of course).

    TJN's arguments ignore the zero-sum nature of the debate. If a service currently provided by a charity can no longer be provided by that charity because its funding is reduced, the state has three options:

    1. take over provision of the service
    2. provide grant funding to the charity so it can continue to provide the service
    3. allow the service to lapse.

    TJN argues for the first of these. As you say, though, theirs is a political argument, not a financial one. Assuming that state provision is no more or less efficient than charitable provision (which is a prudent assumption) the cost will be the same, only the provider will change. There is of course also a one-off cost involved with changing provider, so state provision would have to be more efficient than charitable for this to be a genuinely cost-neutral option. Option 1 also has horrendous implications for the recipients of the services currently provided by charities - the social costs should not be ignored.

    With the second option the cost would be the same (no additional cost from changing provider), but the charity would be receiving direct state funding rather than indirect via tax relief. There are administrative implications around this, obviously, but the disruption to recipients of services would be much less. I therefore think this is more likely.

    The Government's implicit assumption - and yours - is the third option, namely that the service will lapse, and to support that argument you have cited one example of a charity that in your view should not receive tax relief. It may well be that there are some services that could be allowed to lapse, but I suspect that most would in practice have to be taken over by the State in some way (1 or 2), in which case restricting charitable tax relief would do very little to improve Government finances and in the case of option 1 might actually make them temporarily worse.

    There is a separate debate to be held about the charitable financing of private schools, since the real cost has to be considered. Students at private schools "disappear" from the state system, so if the cost of the charitable funding to private schools is less than the benefit to the State of not funding those students through the state school system, it can be argued that the state still gains despite its financial contribution to the private school. Against that though has to be considered the drain to the state sector of teachers working in private education. Charitable financing of private schools is thus primarily a political, not financial debate. I reckon the costs are probably pretty neutral.

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  11. No, I don't have a definitive view on whether services will lapse if charities don't provide them. I think it depends.

    For example, in the case of Eton College and the like, if charitable funding were to be withdrawn they would probably continue. If they were to collapse or withdraw, then because the State already provides the same service, the affected pupils would be legally entitled simply and cheaply to transfer to State schools. Job done. Where is the financial case for allowing primary and secondary schools to opt out of the State sector? I have yet to see hard numbers demonstrating private education saves the State money. Is the taxpayer entitled to see the financial case before taxpayers' funds are used to subsidise private provision?

    On the other hand, there are some services that the State would not replace were the charitable sector to withdraw. Animal charities are an example and I would personally hate to see their services withdrawn or curtailed.

    So I really do not have a general view about substitution. What I can say, with more certainty, is that when the State provision is withdrawn, the charitable sector seldom provides a comprehensive substitute. Social history and the development of the welfare state tells us this.

    As I say, TJN have valid and powerful arguments and should be taken on board when considering these matters. I am not suggesting their position is 100% correct in all cases, simply that their views should be treated with respect.

    I am not a Statist, and I hope TJN is not either. I believe in a mixed economy and so I think charities should exist, and perhaps should receive a State subsidy, where the State is unable to supply humanitarian or vetinary services. The key phrase is where the State is unable to supply the service. In the case of Eton College and the like, the State provides a very close substitute, which is free at the point of delivery, which is why I believe these schools should not be subsidised by the taxpayer and should pay tax on their surpluses.

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  12. Painting with Numbers

    I think what we are all trying to achieve is an appropriate balance between tax funding for state services and "tax" funding for charitable provision. At the moment because there is 100% tax relief on all donations the presupposition is that charitable provision is equal and alternative to state provision, and that people can therefore choose which to support. That's what the "principle of tax-free giving" means, and it harks back to a time when State provision was very much less than it is now. I think this principle is long overdue for review, because the State (unlike charities) now has the responsibility of providing a safety net. The funding of that safety net must in my view take priority over all charitable giving, and therefore I personally want to see tax relief on charitable giving eventually reduced to slightly under basic rate (to establish the principle that charitable donation is NEVER an alternative to paying tax). I am simply noting that the FINANCIAL case is not black and white, because the fact is that the charitable sector as a whole provides extensive services across the whole of society and there would be a serious loss were these to stop. Suddenly restricting higher-rate relief would undoubtedly clobber the income of a lot of charities - far more than would be affected by the proposed tax relief cap - and as I described in my previous comment it is questionable what the benefit to state finances would be.

    From what I've read of TJN they've always seemed pretty statist to me. But maybe I've misunderstood them.

    Yes, the financial case for and against tax relief on private education charities should be seen. It is not as simple as you claim and you still ignore the cost to the state of a child going through state education instead of private education. The state's substitute is NOT free - it is paid for by that child's parents in addition to the private school fees. If those parents put their child through state education instead, their taxes pay for their own child's education instead of providing extra money to the state service for spending on other children. If private schools did not exist, the State education service would need more money to accommodate the children who would have been taught in those schools. Whether that would be wholly offset by the gain of teaching resources and clawback of tax relief I frankly doubt. I think there would have to be tax increases to try to claw back to the State the money the parents would have spent on private education.

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  13. "If you haven't any charity in your heart you have the worst kind of heart trouble" to cure it Help people, let's unite for one good cause, be a volunteer"save live"!
    mawaddainternationalaid

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  14. It's a magnificent written piece. You need plasticity to deal with complexity Charity Proposals

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