You say poh-tay-to, and I say poh-tah-to,
You say tax a
voidance, and I say laudable generosity,
Let’s call the whole thing off…
Well, perhaps let’s not call it off just yet. However, following George Osborne’s opinion piece in the Daily Telegraph, in which he revealed his “shock” at the news that very rich people like minimising their tax bill, the subsequent briefing from number 10 in which they staunchly defended the need to cap tax reliefs on charitable giving, citing dark secrets known by HMRC about ‘questionable foreign charities’, and the media storm that has blown up around this issue, it seems like it would be a good idea to step back and look at some of the facts about charitable giving, tax avoidance, and regulation.
For the purposes of readability (and for my own amusement), I have imagined this as a conversation between a senior Treasury official, Sir Lionel Suspicious-Disposition, and an exasperated voluntary sector policy wonk (name withheld…)
Q: What’s all this about then? Isn’t giving money away to charity just a clever wheeze for rich people to dodge tax?
A: Wow, is that our starting point? OK… Well, the short (and, one would hope, obvious) answer is “no”. Here are a few good reasons why not.
1) In order to maintain that charitable giving is tax avoidance, you have to believe that getting tax relief is the primary reason for someone making large donations. However, almost all the available evidence suggests that almost no-one gives solely for tax purposes. They have to have a reason to give in the first place (such as personal experience, upbringing, religious belief etc). However, it can have a significant impact on the amount a person gives.
2) An important point that bears repeating is that in order to get charitable tax breaks you have to give away significantly more than you get in relief, so you always end up out of pocket. Hence, giving to charity would at the very least seem to be a curiously inept way of engaging in tax avoidance (especially as there are other reliefs available where you do not have to give away lots of money). To adapt a well-known joke: “the best way to make a small fortune out of charitable giving is to start with a large fortune.”
3) A related point is that unlike other tax reliefs (such as loss relief or loan interest relief), where the benefit is a private one enjoyed by the individual, the broader benefit of charitable giving tax reliefs is a public one, as many people benefit from the work of charities.
Q: Hmm, well that all sounds fine, but what if someone is giving to a charity that “isn’t doing a great deal of charitable work”, to borrow a phrase?
A: Well, it really depends what you mean by that. If you mean in a strict legal sense that an organisation isn’t doing enough to qualify as a charity, then that is a matter for the Charity Commission to investigate under existing rules, not an argument for a blanket cap on all donations to charity. As ACEVO’s Sir Stephen Bubb put it on Newsnight: “If the government knows of charities that are not doing charitable work, then tell me who they are and I will report them to the Charity Commission myself”. A sentiment which almost anyone else in the voluntary sector would echo, I imagine, as it is in everyone’s interest to weed these organisations out. Even if the number of bad apples is extremely small, the impact they can have on public trust is a serious concern for the vast majority of legitimate, hard-working charities.
If however, you are just making an insinuation about how much good you feel a particular organisation is doing, then that is a value judgement, and again not the basis for a blanket cap on donations. In order to be eligible to attract tax reliefs, an organisation must meet criteria around its purpose, structure and activities that are enshrined in UK charity law. If you think that an organisation is not effective in furthering its purpose, or that that purpose should not count as charitable, then that is a perfectly valid reason not give to that organisation or to challenge existing charity legislation, but not a basis on which to question others’ right to give. I might, for instance feel that it is not very important to help injured dogs, or support performance of early classical music, but if an organisation doing either of those things legally qualifies as a charity, then I cannot complain if people are able to get tax relief on donations to it.
Q: Aha! But what if the charity is overseas? That’s got to be dodgier, hasn’t it?
A: Not inherently, no. Obviously there are different issues when giving to organisations based in other countries, but most of the principles are still the same.
It is not entirely clear what sort of thing HMRC and the Treasury have in mind when they speak ominously of “donors funnelling money to foreign charities”, but there would seem to be two main possibilities:
1) Direct donations to overseas charities. Most of these won’t even be eligible for tax relief, so the issue won’t arise. However, following a number of test cases a few years ago (particularly the Persche ruling), the EU has now decreed that donations to charitable organisations in other EU member states should be eligible for the same tax reliefs as would be available if the donation was made to an organisation within the donor’s country.
2) Indirect donations to overseas charities. The most likely scenario here would seem to be where a donor has their own charitable trust and uses it to give donations to organisations based overseas, in the EU and outside.
Q: What about that Persche ruling thing? Doesn’t that mean you can just give willy-nilly to all sorts of dubious organisations elsewhere in Europe?!
A: No it doesn’t, as there are specific rules governing gifts made under the Persche ruling. Firstly, any donor who wants to claim tax relief on a donation to a charitable organisation elsewhere in the EU has to provide sufficient evidence to HMRC that that organisation is legitimate (this might include annual reports, a constitution document, or evidence of recognition by the relevant regulatory body in that EU country).
Secondly, an organisation will only be deemed valid if it would also qualify as a charity here in the UK. This rules out the possibility of dubious organisations getting tax relief “through the back door” by qualifying as charitable in a country with laxer requirements.
Thirdly and finally, organisations need to pass a “Fit and Proper Person” test, applied by HMRC, which judges whether the Trustees and Senior Management are suitably reliable and legitimate. This Fit and Proper Person test was only introduced in 2010, so it is surprising that HMRC and Treasury seems to have so little faith in it. As John Hemming, Chair of the Charity Tax Group, was quoted as saying in the Daily Mail: “If this cap has been designed to tackle abuse, I’m surprised they don’t feel comfortable with the legislation they have only recently implemented.”
Q: Well, it does sound like they have thought about this a bit. What about the case of someone using a charitable trust to give overseas though?
A: Well, for a start, that trust would have to pass the test to qualify as a UK charity, so there must be some evidence of a suitable charitable purpose. In order to be eligible for tax reliefs on donations, it would furthermore have to register with HMRC and convince HMRC that grants overseas were actually going towards charitable purposes.
Q: But wait- I think I’ve spotted a loophole! What if you give to an overseas charity and it then pays the money back to you somehow?
A: Well, yes, that would be a problem. And perhaps this is what the Treasury are alluding to. However, it is hard to see how someone could set up a scheme of this sort without falling foul of existing regulation and legislation. There are already rules governing payments made in return for a donation (both for Gift Aid and share gifts), and any arrangement in which a donor employed a family member on an inflated salary could be caught by the fit and proper persons test. If a donor gave a grant via a charitable trust to an overseas organisation and then paid themselves an exorbitant “consultancy fee”, then it seems as though that has gone beyond avoidance into outright fraud, and should be deal with as a criminal matter.
This echoes the Charity Commission’s own guidance on tax avoidance, which explains that:
“Contrary to popular belief, many tax avoidance schemes are not legal and do not successfully exploit a tax loophole. Some schemes may actually involve fraud, and in extreme cases HMRC have initiated criminal proceedings against people operating them. HMRC routinely carries out detailed investigations into tax avoidance arrangements, and if a charity participates in such a scheme it can expect to be included in any HMRC enquiry work.”
Q: Hmm, I see. But you can’t prove that people aren’t using schemes of this sort can you? So perhaps we should err on the side of caution and stick with the cap idea?
A: No, I cannot say with 100% certainty that people are not committing abuses. There will always be people who attempt to bend the rules of any system to maximise their own gain. I admit that I struggle to think of inventive ways of avoiding tax using overseas charities, but perhaps that is why I am a wonk struggling to get my head around government policy, and not a highly-paid tax adviser. However, if these schemes fall foul of existing rules, then surely the point is to enforce those rules better, not introduce arbitrarily harsh new ones? And if this requires further resources for either HMRC or the Charity Commission, to enable them to regulate more effectively, then that would seem to be a sensible use of money.
It would also be good to see the proof that significant losses are actually being incurred through schemes of this sort. So far, the government has given no concrete examples of supposed tax avoidance schemes involving overseas charities, and the vague examples they have given look like they are obvious breaches of existing rules, and should therefore be punishable as it stands. However, they have claimed that the cost to the Treasury of giving to European charities could rise to £150m a year by 2019. (Of course, this includes legitimate gifts made under the Persche ruling, not just fraud).
There are a couple of examples on HMRC’s website, in its “Spotlights” series, that describe ways in which charitable giving could be used for tax avoidance purposes. The first example involves a charity buying £100K of gilts, then selling them via a third party to a donor for a minimal sum (say £10), the donor then selling them for £100K, giving the proceeds to the charity and claiming Gift Aid. The second example involves a slightly confusing arrangement in which a donor gives money to a charity and then receives shares on an unrecognised exchange which are claimed to be worth 8 times the value of the donation, which the donor then also gives away to the charity. However as HMRC explain, both of these clearly fall foul of existing rules (on Gift Aid benefits, tainted donations and qualifying shares), so they cannot be the sort of thing the government is hinting at.
Perhaps the most important point is that if the real concern is schemes involving “dodgy” foreign charities, then a cap on tax relief for charitable donations is not the way to go about addressing it, for two main reasons:
1) It is ridiculously broad brush. Introducing a new measure to combat supposed abuses that will almost certainly have a massive impact on many legitimate charities doing vital work in society seems ludicrous. Feel free to compose your own metaphor from the following: “Baby, bathwater, sledgehammer, nut.”
2) It sends out a very peculiar message. If the concern is that people are getting tax relief on donations that the government thinks are somehow dubious, why not just clamp down on that rather than introducing a cap? Are we to understand that it is OK to give £50K or 25% of your salary to a dodgy foreign charity and claim tax relief, but no more? Odd.
The long and the short of this is that we haven’t been given enough information by the government to know whether this issue of tax avoidance using foreign charities is a justifiable concern, or has been blown out of proportion. And even if it is a concern, it seems pretty clear that the solution is to enforce existing rules more effectively, not introduce a new cap on donations that will affect all charities.