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Above 25% or £50,000, ALL tax relief is withdrawn.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.