The NAO on Gift Aid and tax relief on donations

The National Audit Office, the UK’s public spending watchdog, has today released a report entitled “Gift Aid and reliefs on donations”, which has received some media attention (including this article in the independent which quotes yours truly). The report analyses the current UK system of tax reliefs on charitable donations in terms of the value for money it provides and considers how effectively the system is operated and regulated by HMRC.

The publication of this report may well have caused a sharp intake of breath from anyone who works in the area of promoting charitable giving, as the NAO is famed for putting out seemingly dry, technical reports that actually contain at least one killer piece of criticism that leads to the target of the report getting lambasted. In this case, HMRC probably had the most cause for concern, but charities more broadly will have been nervous to see what the report said about Gift Aid.

The good news is that it is not a hatchet job: HMRC get a bit of a ticking off, but by comparison with others who have come under the NAO’s scrutiny they get off fairly lightly. The overall assessment of Gift Aid is reasonably positive too, concluding that it is an important and valued part of the funding landscape for charities.

It is not all rosy, however. The report does highlight some areas of concern that need to be addressed, which I want to examine here.

Effectiveness of Gift Aid at stimulating giving

Perhaps the most damning part of the report from the charity sector’s point of view is that NAO concludes that there is no evidence that the changes made to Gift Aid in 2000 (which largely gave us the system we know and <ahem> “love” today) have been effective in increasing charitable giving. The implication is that it is hard to argue that Gift Aid in its current form represents value for money because it is not achieving its policy objective.

There are a few things to say about this. The first is that the criticism rests on the assumption that the changes made to Gift Aid in the Finance Act 2000 were made with the specific policy aim of increasing giving. However, it is not clear that this was really the case. The main change was the removal of the lower limit on donations that were eligible for Gift Aid (which stood at £250), and the purpose of this was to democratise Gift Aid by opening it up to people making donations of any size. And there is evidence that it was effective in this aim: a 2006 CAF briefing paper which analysed the impact of the changes made to Gift Aid in 2000 found that the removal of the lower limit had the twin effect of increasing the proportion of people using Gift Aid, but decreasing the size of gifts (understandably, as one no longer needed to donate at least £250 to get Gift Aid). The combination of these trends meant that the overall amount being given did not go up significantly. The CAF report was clear, however that:

“Gift Aid has stimulated more high-volume, low-value, tax-efficient giving rather than significantly bigger gifts.”

And that

“The tax changes to Gift Aid succeeded in ‘democratising’ or widening access  to tax-efficient giving,  and more  female, younger and less wealthy donors now  use Gift Aid”

Of course, there is still plenty of room to get more people using Gift Aid. The NAO report concludes that this is an area where the Government has been remiss, by not doing enough to promote awareness and use of Gift Aid among the public. This is a valid criticism, and one that was tacitly acknowledged in the recent Gift Aid and Digital Giving consultation which posed a series of question about whether a new Gift Aid promotion campaign is needed.

No real terms increase in money going to charities

The NAO report makes much of the fact that, according to them, tax repayments on donations to charities have not increased in real terms since 1999/2000, and uses this as the basis for the argument that the changes to Gift Aid have not been effective (the graph in Figure 8 on p.19 of the report is the key one here). If this is true (and I’m sure it is, as the NAO are smart people) then it is a cause for concern because quite a lot of effort and political capital has been expended over that period in improving the tax environment for giving, to apparently little effect.

Again, there are a few things that are worth noting about this headline figure. The first is that the pre-2000 figures in the graph include charitable deeds of covenant which were the main form of relief on donations until Gift Aid came along to replace them. Deeds of covenant were complicated and far more difficult for the average member of the public to access than Gift Aid is, but tended to be of fairly high value. So what the graph actually shows is that in switching from one system (covenants) to another (Gift Aid), there was some initial attrition in terms of donations, but we are now back up to the same levels (in inflation-adjusted terms) as we were in 2000. Obviously we would all prefer it if the value of donations had doubled, but maintaining the same level using a system that is far more inclusive and democratic actually seems like a reasonably good outcome to me.

The other thing to note, which I don’t think is taken into account in the NAO graph, is that the value of Gift Aid repayments to charities have dropped as the basic rate of income tax has fallen. During the lifetime of Gift Aid, the basic rate of income tax has fallen from 25% to 20%, which has reduced the value to a charity of a £100 donation from £128.20 to £125. Not a huge difference for an individual donation, you might think, but across the totality of donations made each year it adds up to a significant amount.

Increase in repayments to individuals

In contrast to the static level of tax repayments to charities, the NAO highlights the fact that the value of tax reliefs going to individuals as a result of donations has increased in real terms from £130m in 1999/2000 to £940m in 2012-13. The implication, at least in the press release, is that this somehow means that individuals are benefitting at the expense of charities. This is something that I would definitely take issue with.

For a start, the repayments being made to individuals do not represent money that otherwise would have gone to charities. If donors don’t claim the personal relief to which they are entitled, it doesn’t go into a special pot to be shared out equally amongst charities- it simply goes into the general exchequer coffers along with all other tax revenue. The only way to ensure that this money does benefit charities is either to claim it back and then donate it (which some donors do) or calculate the largest donation  you can afford taking the value of the personal tax relief into account (which is how many major donors approach Gift Aid).

The other thing to note is that the  increase in the value of repayments to individuals (shown in the graph in figure 9 on p.20 of the report)  doesn’t suggest that anything sinister is going on. To my mind the increase is merely a reflection of the fact that awareness of the ability to reclaim higher rate tax through Gift Aid has grown, and the actual number of people paying higher rate income tax has also gone up.

There is still an ongoing issue in terms of whether the current system of higher-rate personal reclaim through Gift Aid is the most effective way of treating donations from higher-rate taxpayers. Some have argued that it would be better to allow them to tick a separate box on the Gift Aid declaration and direct their higher as well as basic rate tax to a charity, and others have argued that a single “composite” rate of Gift Aid somewhere between the basic rate and higher rate would be better. CAF has always maintained that the personal reclaim is an important incentive for some donors, but it is hard to find clear, concrete evidence to answer this question one way or another. Which brings us neatly to the next point from the NAO report.

Lack of data

The NAO report is unequivocal in its assessment that HMRC does not collect adequate data to be able to evaluate the effectiveness of Gift Aid. Anyone who has spent any time trying to come up with evidence based policy around charitable giving would almost certainly agree with this: ours is not a policy area overly-blessed with high-quality data. HMRC has made occasional efforts to answer some of the known questions (such as a 2009 report looking at options for reforming the higher-rate reclaim), but the NAO does not seem to be particularly impressed with these efforts. The problem is always that neither HMRC nor anyone else has collected the relevant information in the first place.

If the one thing that comes out of this NAO report is a sharper focus on collecting good data on Gift Aid and other charitable tax reliefs, then that in itself will be a big step forward.

Avoidance and fraud

The other big issue dealt with by the NAO report is avoidance and fraud. I’m not going to get too embroiled in this here, but did just want to pick up on one thing- namely the NAO’s verdict on the relationship between HMRC and the Charity Commission. They note in section 2.22 that whilst there is a memorandum of understanding between the two bodies to facilitate the sharing of information, “…neither the Charity Commission nor HMRC has shared all the information they could have done as specified in the memorandum,” and this has hindered some investigations into suspected abuses. Many observers saw this as one of the key causes of the Cup Trust scandal earlier this year, and it is an issue that clearly needs to be addressed. It will be to the detriment of charities if the two main bodies responsible for regulating them fail to combat fraud effectively because they are unwilling to play nicely together.

Well, that’s certainly a lot of Gift Aid for one day! I think if you look past the slightly unhelpful headline figures, this NAO report has actually done the sector a favour by bringing a few key issues to light- particularly the paucity of data and the ongoing antagonism between HMRC and the Charity Commission. Hopefully having an organisation with the clout of the NAO saying these things will mean that the problems get addressed once and for all.

Rhodri Davies

One response to “The NAO on Gift Aid and tax relief on donations

  1. Pingback: NAO report is ‘reasonably positive’ about Gift Aid | Andrew Goodall CTA·

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