Muddying the water: why none of the proposed “alternatives” to the tax cap cuts the mustard

cut the mustardThe start of another week, and the big charity tax row doesn’t appear to have settled down that much. CAF’s contribution was a poll we commissioned from ComRes, showing that 65% of coalition MPs believe that charitable giving should be exempt from the new tax cap measure. The Treasury has come out fighting though, publishing unprecedented figures on the amount of tax paid by the UK’s wealthiest individuals to support its arguments about the need to clamp down on avoidance (although as many have pointed out, these figures actually show that a very large proportion of wealthy people appear to be paying a healthy rate of tax.)

At the same time, there seem to be increasing signs that the government is willing to sit down with the charity sector and philanthropists to talk turkey about the best way of extricating themselves from this mess. The FT even reports that the Treasury are considering specific alternatives that it hopes might be more palatable to the many groups who are up in arms about the original proposal.

I should be clear at this point that we still believe (as do signatories to the Give it Back George campaign) that charitable giving should simply be exempt from the proposed tax cap. However, since talk of alternative proposals is now beginning to emerge I thought it would be worth having a look at these alternatives, and highlighting why none of them really does the job.

The proposals I have seen raised so far revolve around four main ideas (or combinations of them):

1) Keep the tax cap, but raise the limit.

This seems pretty clear-cut, but it essentially means we should accept any government rationale for introducing the cap in the first place, and be happy that they are willing to ameliorate the impact on charities and donors. The problem is that the government’s rationale is far from clear: half of the time is seems to be about fraud and “dodgy” charities overseas, whilst the other half of the time it is about tax fairness and ensuring that everyone pays some income tax. If the real reason is the former, then as I argued in a previous post, the appropriate response is better enforcement of existing rules, not a blanket cap. However, if the real reason is the latter, then introducing a cap on tax relief of some sort makes more logical sense.

The problem is that we do not agree with lumping charitable reliefs in with others, and in fact this raises in a number of thorny questions for the government:

A) Why do they believe that charitable giving, which involves a public benefit, is the same as offsetting business losses against tax or getting relief on interest payments, where the benefit is private?

B) Are they willing to admit that this will hurt many charities at a very difficult economic time?

C) Are they willing to stand by the view implied by their rhetoric; that the work of charities is essentially different to or less valuable than that done by the State? This seems a difficult stance to take when there is such a large overlap between the aims of many charities and the public good (as evidenced by the extent of government funding for charities through grants and contracts for service delivery). The difficulty also seems particularly acute for a government that has made the “big society” its cause celebre.

D) Have they done any analysis of the value of savings to the government versus the cost to charities? Given that many of these charities are doing work which either relieves pressure on the State or prevents problems that the State would end up having to deal with, it could end up being hugely short-sighted and self-defeating to make some small savings now at the cost of significant expenditure further down the line.

E) Are they comfortable with the inconsistency between the proposal of a cap on tax relief on charitable giving and their own desire to be pro-philanthropy? The Cabinet Office’s own Giving White Paper declared that: “while donors do not generally give to benefit from tax breaks, the right fiscal measures can incentivise greater and more sustained giving.” Yet despite this, it is clear from the angry reaction of many philanthropists that this new measure instead sends out a negative message that the government views wealthy donors as tax dodgers who need to be clamped down upon.

2) Separate any tax cap on charitable giving from other tax caps, so that a donor’s ability to give will not be affected by claiming other reliefs. (This is often suggested in combination with option 1. i.e. have a separate 50% cap on charitable tax relief, as in the US.)

This proposal would seem to suggest a concession by the government that in answer to question A) above, they recognise that charitable giving is qualitatively different from the other sorts of activities for which you can get tax relief. Obviously not different enough to exempt it from the cap, though, which we still believe they should do. And questions B, C and D also remain unanswered.

3) Allow donors to roll their tax relief forward over a number of years (whilst capping it in any single given year).

Again, this looks like an attempt to maintain the stance that people should not be able to reduce their tax bill beyond a certain point in any given year, whilst trying to soften the impact for charities. The problem is that there are a significant number of people who give annually to the extent that they would still fall foul of the proposed cap, and clearly could not roll forward their allowance without harming their donations in the next year. We know from experience at CAF that there are donors who are in this situation, and could not “smooth” their donations in the way suggested.

4) Introduce new giving vehicles such as living legacies, and offer specific exemptions from the cap for giving through these.

I am uneasy about any suggestion that living legacies would be a solution to the tax cap issue. I think living legacies should, in the longer term, be introduced in the UK, as they could be a useful additional tool in the development of a more philanthropic culture. However, they are a solution to a different problem (namely enabling the mass affluent to give more significant sums during their lifetimes due to the promise of greater financial security).

There are also practical issues that would arise if living legacies were rushed in as way of overcome the current difficulties, particularly if they received special tax treatment. The most obvious of these is that the capital gift made under a living legacy arrangement only goes to the charity after a fixed term or on the donor’s death. If donors who could actually afford to make direct donations now were incentivised to use living legacies instead, then it would introduce an time lag before charities could actually access the money. Given that so many charities are feeling intense pressure right now, this would not be ideal.

I think there are compelling reasons, both principled and pragmatic, for the government to think again and exempt charitable giving from any cap on tax reliefs. If they are unwilling to because they have decided they have a doctrinaire objection to people reducing their tax bill, regardless of any arguments about leveraging additional money for public benefit, then there are some difficult questions they must face, as outlined above.

Without answers to these questions- about the impact on charities of introducing a cap, the government’s view of the value of charities, and whether they can still realistically claim to be “pro-philanthropy”- it seems premature to be talking about alternatives or compromises. Obviously we want to work with Treasury to resolve this problem, but bandying around hypothetical alternatives without proper consultation with the charity sector and philanthropists doesn’t seem that helpful.

Rhodri Davies

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