*UPDATE: The Charity Tax Commission has published its report.*

The Charity Tax Commission call for evidence sought views from anyone with relevant knowledge, expertise or experience of the system of charitable tax reliefs in the UK. The Commission was particularly keen to receive thoughts about: the effectiveness of current reliefs; whether the existing system could be improved in order for charities to better serve their beneficiaries; and how the tax system can help to create an operating environment in which charities can maximise the public benefit they generate. The Commission asked that submissions demonstrate how ideas for reform keep within the current fiscal settlement by indicating what other areas of charity tax relief or spending might be de-prioritised in order to provide expenditure in other areas.

CTG responded to the consultation and we reproduced the first part of the response below, which outlines our view on scope of the consultation and some key principles in relation to charity taxation. The full response includes feedback on individual taxes and compliance issues, transparency and the importance of future-proofing tax reliefs.

Charity Tax Commission call for evidence – CTG response 6 July 2018

CTG’s Chairman John Hemming is a member of the Advisory Group to the Charity Tax Commission and will be providing expert feedback on the proposals that emerge from this consultation process. We are grateful to CTG members for their contributions to the Call for Evidence – if you have any further comments, please contact us at info@charitytaxgroup.org.uk or on 02072221265.

The purpose of charity taxation

Charities benefit from important and valuable tax reliefs (estimated at £3.62bn in 2017/18) and it is important that any reforms to them do not have any inadvertent adverse financial impacts on charities. However, charities do still face a cumulative burden of taxation, both in terms of tax payable (particularly irrecoverable VAT and employment taxes) and the administrative burden associated with compliance – both of which are higher than generally perceived by the public. Traditional income sources for the charity sector have come under increased strain. New and improved tax reliefs could help to support charities at a time when their services are more required than ever.

However, CTG believes it would set a dangerous precedent to tie access to and eligibility for tax reliefs to a public benefit test as it would risk judgments as to which charities are more “deserving”. Who would be the arbiter of this definition? It is critical that charities are able to operate within a regulatory and tax regime that is non-partisan and treats as equally worthy any purpose that falls within the legal concept of charity. For a Government (or the sector itself) to manipulate charitable tax reliefs to favour one charitable purpose over another would damage innovation by charities and undermine the freedom of choice which encourages charitable giving. Government is free, quite properly, to give grant-aid to particular types of charities where that is considered to be an efficient and effective means of delivering policy objectives. But the converse – to deny charitable reliefs except in favoured cases – has much more far-reaching and negative repercussions for the sector as a whole. The definition of charities should remain an issue for the relevant independent regulator and it is important to remember that any reform proposals must take account of current and planned devolution (of both charity law and tax powers). We also believe that there could be serious unintended consequences if tax reliefs are linked to levels of expenditure or transparency as often the way charities are set up, operate and report is driven by wider considerations and pressures than taxation.

Other important principles and recommendations that underpin CTG’s response to this Call for Evidence include:

1. The charity sector is not homogenous and the way that taxation and associated reliefs affect different types of charity depends on their size, activities and structure. There may not always be a one-size-fits all solution – more often there is not.
2. A large proportion of activity undertaken by charities either replaces statutory provision or would require Government intervention if it was not available. It would usually cost Government more to provide these services (and there is often neither capacity nor desire to do so). Many charities have taken over, or are willing to take over, the delivery of public services outsourced by governmental bodies, but irrecoverable VAT creates a disincentive to do this. Structural distortions in the VAT system result in a total bill for the sector of at least £1.5bn a year in irrecoverable VAT, so VAT reliefs are very important.
3. Gift Aid is not a public subsidy. It is related to an individual’s tax bill and it is based on the principle that money given away for the public benefit – and therefore no longer available to spend as income – is not subject to tax. This is a principle that the Government has long defended and promoted but continues to be undermined in some quarters by suggestions that income tax relief is an extension of public spending and should be redirected to general exchequer spending, rather than allowing donors to favour their preferred causes. The Government has determined which activities are charitable and the independent charity regulator then determines which organisations are appropriately pursing those activities (not the donor), so the question should not be whether Gift Aid is eligible for certain types of charity, but instead what should be the correct definition of charity, which should be an issue for the charity regulator not the tax authorities.
4. Legal tax relief on giving for individuals must not be conflated with tax avoidance. It is important that systems are in place to tackle any abuse of tax reliefs, but where lawful tax relief mechanisms are available (and openly promoted by the Government), these should be promoted to maximise private philanthropy. It is important to remember that in order for donors to receive tax reliefs (which can often be very generous) they need to give away a significant amount more than they receive in relief.
5. Where anti-avoidance legislation targeting organisations relies on a profit motive, there is a rationale for charities to be automatically excluded given that they are precluded from doing so under charity law.
6. Charities do not benefit directly from corporation tax reductions, which are often used to stimulate the economy and improve competitiveness. This imbalance should be addressed through other tax reliefs, particularly due to the increasing contribution made by the sector to the economy, not least through the delivery of services and R&D.
7. Most employment taxes do not include an exemption for charities. Due to the nature of their operations some charities (particularly those delivering services) have a high staff cost to turnover ratio resulting in a disproportionate impact. Charities end up facing a larger bill which either results in a need for additional funding or reduced capacity to provide services to their beneficiaries.
8. Research by the sector has highlighted the size of the tax compliance burden faced by charities, yet successive Governments have been slow to address the problem. This is a cause for concern since it suggests that some charities are having to devote a disproportionately high level of their resources to compliance: resources which might be better devoted directly to their charitable activities. The administrative costs (both in terms of time and financial resources) involved in complying with new reporting requirements often requires investment in new IT infrastructure, training and professional advice, the cost of which can sometimes undermine the benefit (where relevant) of the tax relief/scheme in question.
9. In addition to the important work undertaken by large, often well-resourced charities, small charities, often run by volunteers, can find tax legislation and guidance very difficult to comprehend, let alone follow. It is important that onerous and disproportionate compliance requirements do not have a chilling effect on volunteers.