It appears that the Government’s new wheeze to cap tax relief on charitable giving has incurred the wrath of the entire voluntary sector, which is an impressive sight to behold! Since the last blog post, there has been a lot of movement: most notably a new campaign led by CAF and NCVO called “Give it Back George: Drop the Charity Tax”, which has already garnered over 400 official supporters!
I was hoping that the post-Budget dust might have settled a bit by now, so that we had a better idea of exactly what the implications of the new tax cap measure are. However, if anything the situation seems to have got even dustier, with lots of different interpretations of the new rules being put forward, various figures flying around, and confusion generally reigning.
Given this (and given that discussions of the mechanics of charitable tax reliefs have formed the basis of most of my human interactions for the last few days), I thought it might be worth doing a brief follow-up to my original post on the subject in order to flag up some of the issues that have arisen in various discussions, and clarify our understanding of the proposed rule.
Q: Right, so…run this by me again- what’s the problem?
A: I’m hoping I pretty much covered this one in my original blog post. But just in case: the government has introduced a new cap on previously uncapped tax reliefs, of £50,000 or 25% of income (whichever is greater). As it stands this will affect charitable tax reliefs. The concern is that this will discourage donors (and particularly those giving large gifts).
Q: I think I see… But how does that work with Gift Aid? Doesn’t the tax relief go to the charity?
A: Good question.. Yes, the basic rate of tax paid on a donation can be reclaimed by the charity receiving the gift through Gift Aid, but it is also the case that a donor who is a higher-rate taxpayer can claim back the difference between basic rate and higher rate tax as a personal relief.
Exactly how the new rule is supposed to apply to Gift Aid is not yet 100% clear, as it could apply to the whole value of relief available (basic and higher rate) or just to the personal higher rate element. Our belief (and one seemingly shared by many) is that it the latter is more likely, as it is hard to see how the former could be defensible or even workable.
Q: So what will the impact of the new rules be on a donation through Gift Aid?
A: The crucial point to keep in mind here is that it is the value of the tax relief that is important, not the value of the donation.
The new rule applies to donors seeking to claim £50K or more in relief, and the size of donation you would have to make in order to get this much relief depends on your highest rate of tax. For a 40% taxpayer, the smallest gift that produces £50K personal relief through Gift Aid is £200K. For a 50% taxpayer, the relevant figure is £133K, and for a 45% taxpayer it is £160K.
Beyond these lower limits, the new rule kicks in, and the relevant question is whether the amount of relief a donor is trying to claim is more or less than 25% of their income. For example:
Example 1: Felicity Culture-Vulture earns £800K and is a 45%-rate taxpayer . She makes a lump sum gift of £1m to a local museum to help build a new education centre. Through Gift Aid the donation is worth £1.25m to the museum after basic rate tax has been reclaimed. Under current rules, Ms Culture-Vulture is then able to claim back £312.5K in personal tax relief for herself, which she plans to give to other causes. However, under the new rules, her tax relief would be capped at 25% of £800K, i.e. £200K. This means that she (and the other causes she supports) would lose out on a potential £112.5K.
Or, to take an example of someone paying less than the top rate of tax:
Example 2: Tony Caresalot is a manager earning £140K a year, and thus a 40%-rate taxpayer. He has a windfall from some long-held shares, and decides to set up his own managed charitable trust. He wants to make a large, one-off donation of £300K as an initial float for his trust. Through Gift Aid, he is able to add £75K of basic rate reclaim, taking the total up to £375K. Under current rules, he would then be able to claim an additional £75K of personal relief, which he was planning on putting into his trust as well (and could technically also claim additional Gift Aid on, but let’s leave that…). However, under the new rules, he would be limited to claiming £50K of relief (because he is trying to claim more than £50K and 25% of his salary (i.e. 35K) is less than £50K). So Tony would only be able to put £425K, rather than £450K into his trust, thus losing out on £25K.
(In case anyone wants to replicate examples like this at home, I have knocked up a little spreadsheet that lets you enter size of donation, donor income and tax rate, and then calculates the difference between the tax relief available currently and under the new rules)
Q: Wow, I think I just about got that! But wait- what about giving shares?
A: Well, that’s a good question, and one of the big issues that hasn’t been clarified yet. Share relief is a bit different from Gift Aid, as instead of reclaiming tax already paid on a donation, the donor is instead able to make a direct deduction from taxable income. That means that a donor earning £500K who makes a donation of £250K worth of shares is able to offset the value of those shares against their taxable income (so they only pay tax on £250K).
The big question here is how this is interpreted under the new rules. Is the value of the tax relief taken as the amount that can be offset against income tax liability, or the reduction in income tax that results from this? This could make a huge difference- if the latter is true, then it is broadly in line with the Gift Aid situation. However, if the former is true (which seems quite likely), then the value of the tax relief is actually equal to the value of the gift.
This means that anyone earning less than £200K would be limited to giving £50K worth of shares tax-effectively (because 25% of their income < £50K, so the cap is £50K). Those earning more than £200K would be limited to 25% of income (because 25% of income > £50K, so the cap is 25% of income). Hence, someone earning £1m would now only be able to give £250K of shares tax-effectively.
Given that it is not unusual for people to make gifts of shares that are in excess of their annual earnings, this could have a serious impact on giving.
Q: Blimey, that sounds bad! Is payroll giving still going to be OK?
A: Again, this is an area where there has been little clarity so far. However, as an uncapped tax relief, we have to assume that payroll giving will be affected (and there have been indications are this is the plan). Since gifts made through payroll are pre-tax, they result in a reduction of income tax liability, so the situation is likely to be similar to that described above for gifts of shares.
Quite how this will work in practice, I don’t know. However, it will probably require a major overhaul of the way payroll giving works, either to allow tax to be taken first and then reclaimed (so basically making payroll giving into a pointlessly complicated version of Gift Aid) or to allow HMRC to claw back tax if the threshold is exceeded.
Either way, this could be the death blow for payroll giving: it is already accused of being overly complicated, so the addition of a new layer of bureaucracy would probably suffocate it.
Given that the Prime Minister himself has spoken of his enthusiasm for payroll giving in the recent past, this definitely looks a like a case of the right hand not only failing to talk to the left hand, but actually attacking the left’s favourite glove with a pair of scissors and an indecent sense of glee.
Q: Well, that all sounds pretty worrying. Still, at least that’s all…isn’t it?
A: Unfortunately there is one more thing: all the explanations and examples given above are on the basis that the only tax relief being claimed is on charitable giving, but in fact the new rule applies across ALL uncapped reliefs. This means that includes things like interest payments on loans and business losses offset against earnings. Anyone taking advantage of these tax reliefs as well will find their charitable tax relief “allowance” cannibalised.
For instance, to take a scarily plausible example: Sidney Givingmore is an entrepreneur who owns a handful of start-ups and SMEs. From these, he pays himself a total salary of £200K. One of these start-ups has yet to recoup its initial outlay, so is currently running at a loss, whilst one of the SMEs is currently relying on a loan to finance its expansion. The losses total £20K, and the interest on the loan costs £10K. At the same time, Sidney has recently managed a successful IPO of one of his other companies, so he is sitting on a large pile of shares. Having decided that he is perfectly comfortably off already, he wants to give a large chunk of these shares away- a total gift of £100K. However, under the new rules, even without other considerations, his gift is limited to £50K, as this is 25% of his income of £200K. And given that he has already used £30K of his allowance for other things, he is in fact restricted to giving £20K of shares. A loss to charities of £80K.
HMRC and Treasury’s official line that “just because someone gives to charity, it doesn’t mean they shouldn’t pay any tax” betrays a supposition that tax-effective charitable giving is effectively a form of avoidance. This wilfully misses the point that in order to get charitable tax reliefs, you have to give the money away in the first place, so you never end up with a net gain. It would therfeore seem like an extremely inefficient way to avoid tax, if that was your intention.
The negative attitude exuded in the Budget also seems bizarrely at odds with a Government that has such an explicit agenda to increase philanthropy and charitable giving , and which is constantly encouraging us to strive for a “big society”. I will delve deeper into this inconsistency in another blog post.
The long and the short of all this is that the proposal to cap tax reliefs is definitely bad news for the voluntary sector. It will not just affect a few major donors and a few large charities; it will affect many donors who do not consider themselves especially wealthy, charities large and small, and trusts and foundations across the country. We need to continue to work together to get the government to drop this potentially disastrous policy.
(NB:In the above examples, for the sake of simplicity I have ignored the effect of the tax-free personal allowance and the various tax credits available. Obviously in the case of share giving, these will have an impact on the actual value of a donor’s income tax liability).
(NB2: As a couple of people have pointed out, both Gift Aid examples assume the donor takes into account the reduction in their tax payment and gives the value of the marginal tax relief to charity as well. Of course, this doesn’t have to be the case- they could just use the relief to lower the overall cost of making the donation. I was just trying to stress the potential loss to the recipient charity.)