The Charity Tax Commission has published its report, Reforming charity taxation – towards a stronger civil society, following a Call for Evidence last year. A press release summarising the main recommendations can be read here. CTG’s response to the Charity Tax Commission Call for Evidence can be read here.
Responding to the publication of the Charity Tax Commission report, the Charity Tax Group (CTG) commented:
“Establishing the Commission was a welcome initiative as it has helped shine the spotlight on the highly-complicated tax regime facing the charity sector. The report usefully identifies that some of the tax rules under which charities operate actually defeat the purpose of the legislation and we welcome the call for tax administration and legislation to keep pace with technological advances – something that the Charity Tax Group (CTG) has been advocating for some time.
“At the launch of the report, the Chairman of the Commission, Sir Nicholas Montagu, explained that adopting a fiscally neutral approach would mean that policy makers would have no excuses for not implementing the reforms. CTG accepts that this is a sensible short-term approach given the current financial uncertainties due to Brexit and hopefully can result in some important and targeted quick fixes. However, overall, the impact of this report has been limited by restricting its recommendations to fiscally neutral changes to the tax system, as there may have been greater engagement and creative thinking from the sector if broader parameters had been set. Simply moving money from one pocket to another in the same pair of trousers when you have outgrown the trousers is a problem still to be resolved.
“An implicit assumption in seeking to maintain fiscal neutrality is that tax reliefs received by charities are Government expenditure that could simply be redistributed. There is a strong and long-standing rationale for many tax reliefs and it is important that key principles are not undermined e.g. the principle underpinning donor reliefs (including Gift Aid, gifts of assets and payroll giving) is that individuals should not pay tax on income given to support charities. As such, this is not strictly Government expenditure. Charity reliefs from VAT, rates, corporation tax and other taxes create an even playing field with companies (which are able to offset costs against fees and recover their VAT costs) by reducing costs and recognising charities’ not-for-profit status. CTG cautions against any attempt to limit reliefs to particular types of charities: not treating charities equally jeopardises the independence of the sector – something to be avoided at all costs.
“While the focus was on how effective tax reliefs are, which is important, it would have been helpful if the report had also looked in more detail at the scope and value of taxes actually paid by charities and whether this is appropriate. The truth is that if many of the existing tax reliefs were not in place the cost to the sector and the wider community and economy would be higher as charities would have fewer resources to deliver their vital work, much of which would revert to being the Government’s responsibility to provide. A holistic view is therefore needed.
“The report includes a number of important short term recommendations which are welcome. Many of these were highlighted in CTG’s response to the Commission’s Call for Evidence. These include proposals to: protect VAT reliefs on digital advertising; extend VAT relief to e-publications; make sharing costs and services among charities easier; improve the promotion and take up of Gift Aid; and to protect and maximise rates relief.
“The long term recommendations rightly focus on the three key issues of business rates, Gift Aid and irrecoverable VAT. However, in order to make substantive change we do need to consider more radical measures to reduce the tax burden that charities face, measured against the social benefit and tax revenues these reliefs create. We also need to look to future proof taxes and reliefs and, in this vein, CTG’s review of the Future of Gift Aid is noted in the report. The Commissioners rightly note the general lack of data available on reliefs and the report highlights that CTG’s forthcoming research on the socio-economic value of VAT reliefs and the cost of irrecoverable VAT, will be an important contribution to the debate. It is an endorsement of CTG’s determination to take on this ground breaking project and we encourage all charities to support it.
“It is important that the sector now has the opportunity to review the Commission’s proposals, some new and others being revisited, to test how practical they would be to introduce and administer and the relevant cost and merits. We will be consulting our members and would be happy to work with HMRC and other sector bodies going forward.
“Ultimately the Commission’s lasting legacy may have been to highlight the need to improve our understanding of the value of charity tax reliefs and to generate debate about how they can be future-proofed. This would be a considerable achievement.”
The report sets out a number of recommendations which the Commission wants the Government to consider, including:
- 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.
- 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.
- Make offering ‘Payroll Giving’ schemes mandatory – 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.
- Review Gift Aid and text giving – HMRC should consult with voluntary sector bodies and phone companies on the practicalities of text donations and Gift Aid declarations with a view to providing guidance on the processes that need to be in place and what HMRC would deem to be a sufficient audit trail. Building on the work of ‘Future of Gift Aid’ group currently being convened by the Charity Tax Group, HMRC should also look at how emerging technologies can make the administration of Gift Aid easier and more efficient.
- Review GASDS – To improve accessibility further and reduce the administrative burden associated with the Gift Small Donations Scheme, Government should explore removing the need for a charity to be previously registered with HMRC and to have made Gift Aid claims in the past. An increase in the amount that can be claimed each year – currently £2,000 (on £8,000 worth of donations) – would also help to encourage more organisations to engage with GASDS, while allowing text donations would reflect the increased use of smartphones and the growth in impulse donations.
- Review Corporate Gift Aid – The government should conduct a review of Corporate Gift Aid to assess whether the previous changes were a success and examine how the system can work best to maximise the amount of money charities receive through tax exemptions or incentives for corporate entities.
- 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.
- 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.
- Improve the discretionary relief and claims process – To help charities plan their finances with confidence the award criteria of discretionary rate relief should be published and easily accessible on all authority websites. Government should also issue guidance to billing authorities clarifying that mandatory relief is available to smaller unregistered charities, not just those registered with the
Charity Commission. To save charities and billing authorities time and effort, the government should create a standard downloadable form available on GOV.UK which is recognised by all billing authorities and which could be completed and submitted electronically to each billing authority requesting it.
- 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.
- 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.
Key questions for evaluating effectiveness of charity tax reliefs
The Commission believes more should be done in the UK to better understand the effectiveness of the charitable tax reliefs currently available. When looking to evaluate tax reliefs, the following questions should be considered:
- Do they achieve their intended objectives?
- Are the purposes of the relief better served by direct subsidy?
- Are they fully utilised?
- Does a lack of awareness or complexity negatively impact take up?
- Are the costs of claiming reliefs excessive?
- Are they value for money?
- Do they result in skewed take up, e.g. by region/beneficiary characteristics?
- Are recipients of reliefs (both charities and donors) sufficiently accountable for them?
- Are they robust against abuse?
- Should they contain a sunset clause to prevent them outliving their usefulness?
The Commission recommends research into the following areas:
- the extent to which individual reliefs generate public benefit for society and value for money for the exchequer
- research into the impact of business rates relief for charities on small businesses and local high streets
- the bureaucratic challenges associated with the administration of reliefs, especially Gift Aid and VAT
- the opportunities that advances in technology present for the administration of reliefs and promoting philanthropy
- how reliefs could be used to attract overseas philanthropy
- Gift Aid Donor Benefits – rules should be amended so that the benefit value is calculated based on the cost to the charity to provide that benefit, as is currently the case with events that are not open to the public (where the value of the benefit is determined by the cost of putting on the event to the charity divided by the number of guests). This would provide charities with certainty and security when working with donor benefits and would support the Government to achieve its stated aim of maximising the amount of Gift Aid claimed on eligible donations.
- VAT and advertising – Government should review the approach to the VAT treatment of online advertising to reflect the reality of modern-day fundraising practices, or risk weakening this important relief to the sector.
- VAT and e-publications – HMRC should adopt the change to the EU VAT directive agreed by the EU Council to apply the same VAT rate to e-publications such as e-books and online newspapers as for their printed equivalents.
- Social Investment Tax Relief (SITR) – The list of excluded activities need to be reviewed by government, to allow investment in areas such as care homes or other areas of value to society which currently are unable to benefit from the relief. The cap on investment should also be revised or scrapped. Depending on the UK’s future international trade obligations, the UK’s forthcoming departure from EU presents potential opportunities in this respect, as State Aid
rules may no longer apply.
- Stamp Duty Land Tax (SDLT) – Stamp Duty Land Tax should be reviewed with the aim of both simplification and clarity for charities. This should consider extending the relief to unincorporated charities who, unlike incorporated charities, are currently unable to claim group relief from SDLT in respect of intra-group transfers.
- Capital Gains Tax (CGT) – The rules that allow grouping for accounting purposes should be used for tax purposes.
- Apprenticeship Levy –The use of levy funds should be widened to include the training of volunteers, while the government should develop more eligible apprenticeship standards that support delivery of charitable objectives. To introduce more flexibility in the way that charities can spend their funds from the Levy, the percentage of Levy funds that can be transferred to eligible organisations should also be increased alongside an extension to the 24-month period before funds expire and are lost by the charity.
- Climate Change Levy – Government should explore the possibility of using income from the Climate Change Levy to contribute to energy efficiency grants for village and community halls. Government guidance to energy suppliers should clarify that relief from the Climate Change Levy is available to unregistered charities.
The Charity Tax Commission has also published a research report on the distribution and scope of charity tax reliefs.