Charities enjoy a range of tax reliefs, in recognition of the public benefit they provide to society.
They have done so since the early days of tax legislation. While much else has changed over the decades, the contribution made to domestic and global causes and the place of charity in the hearts of the public remain very strong.
It is more than 20 years since the last review of charity tax reliefs and in late 2017 an independent group was convened to look at the range of reliefs and whether they were still fit for purpose. What follows is a summary of the group’s remit and its proposals for reform. Some of them provide the potential for generating more funds for the sector; others a call for simplifications to sometimes complex processes (which in turn may stimulate more charitable support).
The Charity Tax Commission, chaired by Sir Nicholas Montague, the former chairman of the Inland Revenue (later HMRC), has said tax reliefs offered to UK charities urgently need an overhaul. In a new report, the commission makes a number of recommendations which would ensure giving is made easier, while charities increase their income by hundreds of millions a year, and spend less on unnecessary admin.
Specifically, changes to the rules surrounding Gift Aid– where the taxman adds 25p to every pound given – and other reforms could incentivise giving and offer financial protection to UK charities and those who depend on them.
Sir Nicholas said: “It’s been 20 years since charity tax reliefs were last reviewed, and many of the rules were written for an analogue era. With people giving by text message and contactless payment, and with many donors themselves increasingly mobile, we need a system fit for the digital age if we are not to see the UK’s natural generosity held back.
“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.
“Yet none of these proposals should involve significant extra public spending or lost revenue. It’s the right time to get on with this.”
The independent commission was convened by the National Council for Voluntary Organisations (NCVO) in 2017 and in July 2019 launched its findings and recommendations.
It says that while top earners can use their self- assessment forms to claim back the additional income tax they have paid on money they give, many choose not to, while others opt not to pass it on to their chosen cause.
To improve this, one of the Commission’s most eye-catching proposals is to enable higher rate tax
payers to pass their tax relief onto their chosen charities more easily, potentially raising at least £250m more for good causes every year.
Its report, ‘Reforming charity taxation: towards a stronger civil society’, also proposes a central database like the NHS Organ Donor Card which would enable people to complete a single, enduring universal declaration covering all their subsequent gifts to charities. This would mean fewer forms and would make giving simpler for everybody.
The NCVO almanac estimates that the UK public gave around £11.4bn to charity in 2016/17, with £1.3bn received by charities in Gift Aid repayments. Making admin simpler could make inroads into the £560m of Gift Aid that goes unclaimed each year, boosting funding for charities further.
Sir Nicholas said: “Today, charitable tax breaks are worth a total of around £5bn a year. The question is whether the current rules, regulations and reliefs behind this do everything they can to support the brilliant work of our charities and amplify the kindness of our fellow citizens. Clunky systems could mean people’s generosity and the work of charities is being stifled when it should be nurtured. Quite rightly, the money we give to charities has been treated as being essentially tax-free since the first Income Tax Act, in 1842. Yet the current system of Gift Aid sees hundreds of millions being lost every year. That has to change.”
The new report sets out a number of recommendations which the Commission wants the government to consider, including:
- Reform Gift Aid – 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, charities could receive at least an extra £250m per year.
- Launch a Universal Gift Aid Declaration Database (UGADD) – this would provide a single, enduring declaration which individuals can make covering all their subsequent gifts to charities. Consulted on by the government in 2013, the commissioners believe this idea should be resuscitated.
- Make offering ‘Payroll Giving’ schemes mandatory – this option for working people, also known as Workplace Giving or Give As You Earn (GAYE), enables them to donate out of their pre-tax income. Although uptake has been increasing, with 5,500 employers offering such schemes and 1m employees using them, still only 3% of donors give in this way. The government should insist on employers offering this to staff, much as they have done with pension auto-enrolment.
- Simplify Value Added Tax – 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 which could boost productivity and economic growth. Additionally, HMRC should provide clear guidance to public bodies so they can provide the VAT status of any charitable funding, with grants and contracts treated differently for tax purposes but often difficult to distinguish in practice. Many charities spend significant resources trying to do this for themselves.
- Remove VAT from wills that include a charitable donation – This would give solicitors a greater incentive to raise the question of whether someone wants to leave a gift to a charity in their will. It is estimated that if all professional advisers referred to the potential of legacy giving, this could generate a further 15,000 charitable legacies a year.
- Consult on extending business rates relief to wholly- owned trading subsidiaries – charities get 80% relief on non-domestic business rates, which can be topped up by a further 20% by local authorities. 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.
- Comprehensively reviewing VAT for charities – this could address systemic anomalies, improve efficiency and increase charitable activity.
- Reconsider business rates relief - this benefits certain charities disproportionately and may not reflect the increasingly digital world in which charities operate. A review could consider the equity of distribution and the public benefit existing relief delivers.
- More research into Gift Aid – its distribution tends to favour certain types of charities working in certain areas and working on certain topics. Additional understanding could facilitate reform, such as different ways of distributing Gift Aid.
The report highlights that everyday millions of people give money to charities of all shapes and sizes. This enables them to do so much to strengthen communities, protect heritage, look after the environment and provide essential services to our fellow citizens. With the continuing strain on the public finances forcing the retreat of the state from its universal funding role in many areas, charities often pick up the slack. This would be impossible without the financial support tax reliefs provide as well as the extraordinary work done by so many dedicated volunteers and professional staff.
The commission set out to ask whether the tax system could be better employed not just to help protect existing giving but also to encourage a new wave of philanthropy. Its answer is a clear ‘yes’. It recognises that although we all give in different ways, few of us like fiddly forms and none of us want to see too much being spent on unnecessary admin. Sensible reforms are overdue.
The commission’s final report can be found at www.ncvo.org.uk/tax. It includes UK-wide data about who claims Gift Aid and receives business rate relief, with comparisons by size and sector of different charities.
The value of investments and any income from them can fall and you may get back less than you invested. Please note that this document was prepared as a general guide only and does not constitute tax or legal advice.
While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Tax treatment depends on your individual circumstances; therefore you should not rely on this information without seeking professional advice from a qualified tax adviser.