Charity Tax Commission: Tax reforms could boost charities and unlock wave of giving

  • New tax rules and more Gift Aid awareness could bring charities 100s of millions/year
  • Universal donor database and encouraging Payroll Giving would boost funds further
  • No review of charity tax reliefs in 20 years despite digital revolution

Tax reliefs offered to UK charities urgently need an overhaul, according to a new report from a group led by the former chairman of the Inland Revenue (later HMRC).

Taken together, its proposals would ensure giving is made easier while charities increase their income by 100s of millions a year and spend less on unnecessary admin.

Sir Nicholas Montagu, chairman of the independent Charity Tax Commission, has said that changes to the rules surrounding Gift Aid – where the taxman adds 25p to every pound given – and other reforms could incentivise giving and offer financial protection to UK charities and those who depend on them.

Speaking ahead of the publication of a new report on charity taxation, Sir Nicholas said:

It’s been 20 years since charity tax reliefs were last reviewed, and many of the rules were written for an analogue era. With people giving by text message and contactless payment, and with many donors themselves increasingly mobile, we need a system fit for the digital age if we are not to see the UK’s natural generosity held back.

The Charity Tax Commission’s recommendations could help bring the tax treatment for charitable giving into the 21st Century and result in a huge increase in the amount of money available for good causes.

Yet none of these proposals should involve significant extra public spending or lost revenue. It’s the right time to get on with this.

The independent commission was convened by the National Council for Voluntary Organisations (NCVO) in 2017 and is today, Wednesday 17 July 2019, launching its findings and recommendations.

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 most eye-catching 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.

Sir Nicholas 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 new report sets out a number of recommendations which the commission wants the government to consider, including:

Short-term proposals:

  • Reform Gift Aid – unless donors opt out, the value of additional and higher-rate tax reliefs (which reflect the 45% and 40% tax bands) 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. Consulted on by the government in 2013, the commissioners believe this idea should be resuscitated.
  • Make offering ‘Payroll Giving’ schemes mandatory – this option for working people, also known as Workplace Giving or Give As You Earn (GAYE), enables them to donate out of their pre-tax income. Although uptake has been increasing, with 5,500 employers offering such schemes and 1m employees using them, still only 3% of donors give in this way. The government should insist on employers offering this to staff, much as they have done with pension auto-enrolment.
  • 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. Reviewing the rules could encourage cross-sector partnerships and help the UK increase R&D investment which could boost productivity and economic growth. Additionally, HMRC should provide clear guidance to public bodies so they can provide the VAT status of any charitable funding, with grants and contracts treated differently for tax purposes but often difficult to distinguish in practice. Many charities spend significant resources trying to do this for themselves.
  • Remove VAT from wills that include a charitable donation - This would give solicitors a greater incentive to raise the question of whether someone wants to leave a gift to a charity in their will. It is estimated that if all professional advisers referred to the potential of legacy giving, this could generate a further 15,000 charitable legacies a year.
  • Consult on extending business rates relief to wholly-owned trading subsidiaries – charities get 80% relief on non-domestic business rates, which can be topped up by up to a further 20% by local authorities. However, charities can lose this benefit if they set up trading subsidiaries in order to comply with rules on charity trading.
  • 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.

Longer-term proposals:

  • Comprehensively reviewing VAT for charities – this could address systemic anomalies, improve efficiency and increase charitable activity.
  • Reconsider business rates relief – this benefits certain charities disproportionately and may not reflect the increasingly digital world in which charities operate. A review could consider the equity of distribution and the public benefit existing relief delivers.
  • More research into Gift Aid – its distribution tends to favour certain types of charities working in certain areas and working on certain topics. Additional understanding could facilitate reform, such as different ways of distributing Gift Aid.

Sir Nicholas Montagu added:

Every day, millions of people give money to charities of all shapes and sizes. This enables them to do so much to strengthen our communities, protect our heritage, look after the environment and provide essential services to our fellow citizens.

With the continuing strain on the public finances forcing the retreat of the state from its universal funding role in many areas, charities often pick up the slack.

This would be impossible without the financial support tax reliefs provide as well as the extraordinary work done by so many dedicated volunteers and professional staff.

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.

I’m grateful to my fellow commissioners and to NCVO for their support in getting this far. 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.

The commission’s final report can be found at www.ncvo.org.uk/tax. It includes UK-wide data about who claims Gift Aid and receive business rate relief, with comparisons by size and sector of different charities.

Read Sir Nicholas's blog post about the report.

Notes

In the autumn of 2017, NCVO commissioned a review of the tax reliefs available to charities. It then provided the secretariat to the independent Charity Tax Commission, whose views may not necessarily reflect those of NCVO.

Chaired by Sir Nicholas Montagu KCB, the other commissioners were: Sarah Atkinson; Dan Corry; Pesh Framjee; Lynne Oats; Clare Pelham; and Eleanor Shawcross Wolfson (who stood down in December 2018 as a result of taking up a government role). Further details can be found at Appendix B of the report.

In 2018 the commission made a call for evidence to which it received 121 written responses, a list of respondents can be found at Appendix D of the commission report. The commission’s overall consultation exercise also included 13 themed roundtable discussions with charities working across various subsectors.

In addition, the technical merits of the commission’s proposals were commented on by an advisory group of taxation experts as well as a reference group of stakeholders from across the voluntary sector. The membership of both groups can be found at Appendix E of the report.

For further information:

Please contact Matthew Maxwell Scott at Certus Communications on 07834 288862, Ben Welsh on 07568 382040 or Louise Zucchi on 07399 477535 or This email address is being protected from spambots. You need JavaScript enabled to view it.

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