Charity tax reliefs need an urgent overhaul with the potential for charities to benefit from significant sums of money if rules were reformed and there was greater awareness of Gift Aid, the NCVO’s Charity Tax Commission has said.
The independent commission was convened by the NCVO in 2017 and today, 17 July, launches its findings and recommendations.
Under its proposals, giving would be made easier meaning charities could receive hundreds of millions more a year in income, while spending less on admin. Changes to the rules surrounding Gift Aid and other reforms could also incentivise giving and offer financial protection to UK charities and those who depend on them.
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 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 Civil Society 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.
The report recommends a number of measures. In the short term, these proposals include:
- Reform Gift Aid – unless donors opt out, the value of additional and higher-rate tax reliefs 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.
- Make offering ‘Payroll Giving’ schemes mandatory. Although uptake has been increasing, only 3% of donors give in this way.
- 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.
- Remove VAT from wills that include a charitable donation. It estimates that if all professional advisers referred to legacy giving, this could generate a further 15,000 charitable legacies a year.
- Consult on extending business rates relief to wholly-owned trading subsidiaries.
- 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.
In the longer term, the proposals include:
- A comprehensive review of VAT for charities to address systemic anomalies, improve efficiency and increase charitable activity.
- Reconsidering business rates relief.
- Conducting more research into Gift Aid.
Sir Nicholas Montagu, Chair of the Charity Tax Commission, 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 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. The answer is a clear ‘yes’.
“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. Now it’s up to the government to grasp the nettle and make sure the generosity of our fellow citizens is matched with a charity taxation system that is fit for purpose.”
Commenting on the report, Rob Cope, Director of Remember A Charity, highlighted the importance of incentivising legacy giving for all supporters, saying:
“We know that the current Inheritance Tax breaks are a powerful motivator for professional advisors to raise the option of legacy giving with clients and to encourage people to give, but they are only available to a minority of the public. To normalise legacy giving, we need to create a more level playing field and ensure that legacy giving is not something reserved for the wealthiest in society, but something that we are all encouraged to do.
“Introducing a VAT exemption on charitable Wills would benefit every supporter, encourage legacy giving and ensure that charitable bequests are considered every time somebody writes a Will.
“The key to growing legacy giving is driving consideration and conversation. Fiscal incentives such as our VAT proposal have huge potential to be a powerful lever for change, helping charities and advisors to become louder about legacies.”
CAF’s Chief Executive Sir John Low also commented, saying:
“Harnessing technology to make it easier to claim Gift Aid and offering regular payroll giving to all employees could be valuable boost to our culture of charitable giving.
“The many charities that make such a difference to millions of lives need our support now more than ever, and Sir Nick Montagu’s Charity Tax Commission should be commended for making practical, positive proposals for supporting giving that should be easy for government to implement.
“The proposal to divert higher rate tax to charities needs very careful thought because people’s tax affairs are rightly private. We all aspire to increase the amount of funds available for charities, but must avoid unintended consequences that might discourage people from giving or undermine the relationship between charities and their supporters.
“At a time when those bidding for the keys to Number 10 are offering support for many parts of the economy, they should remember that simple, low cost changes to the tax system can make a major difference to organisations working with the most vulnerable in society, and to those who support them through donations.
“The generous tax reliefs that charities enjoy in our country are so much more than a mere policy mechanism. They are a profound indication of our support for the charities and civil society that play a vital role in our democracy and help make our country what it is today.”
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