What’s all the fuss about tax reliefs anyway?

Blimey, when the PM gets hounded “from Derby to Indonesia” (as one newspaper put it) an issue really has struck a nerve.  In this case the cap on tax reliefs for charitable donations announced in the Budget.

Tax has always been an unexciting and unsexy business, charity tax even more so (and way more obscure). So it’s somewhat surprising to see the subject adorning the cover of Private Eye, the subject of Newsnight specials, and Radio 4 debates with Polly Toynbee.  I have had to stop clipping articles on the issue to avoid a newspaper mountain in my recycling and to get my life back.

And why? Because of a throwaway line in the Budget about capping the amount of income tax relief claimable by higher rate tax payers, including reliefs on charitable giving. And it’s that last adjunct which is causing all the furore. It’s the equivalent of whopping a tax on charitable giving for the rich. Which makes it almost as bonkers as the pasty tax.

Against a backdrop of Big Society and policies and rhetoric designed to encourage charitable giving and a strong and healthy voluntary sector in the UK, this is an odd move by the Treasury.  It seems to have come out of the blue, catching almost everyone offguard. The Office for Civil Society (OCS) and the Minister, Nick Hurd, certainly did not know about it in advance; neither did the Culture Secretary, Jeremy Hunt.

So what was the purpose of this announcement? What motivated this apparently counter-message move? Well, this seems quite unequivocal: HMRC and the Treasury’s abhorration of tax avoidance. The clue is firstly in the name of the so-called “clarification” document issued by HMRC after the fact: “Cap on unlimited income tax reliefs” [pdf document]; which begins with the indignant statement:

“Currently individuals can offset their entire income against income tax reliefs, and as a result pay no income tax at all.” And there’s nothing the tax man detests more than people not paying tax!"

So has charitable giving just been caught in the crossfire as so much collateral damage in a bigger war HMRC and the Treasury are fighting against tax-avoidance? Yes, quite possibly. We were told, off the record, after the Budget that HMRC didn’t anticipate that charitable giving would be much affected as it makes up only a small portion of this whole income tax avoidance issue – about 20% it has been estimated (by Faisal Islam).

So is it all a storm in a teacup, as Nick Hurd has tried to reassure us in Third Sector, saying that:“For the vast majority of the sector....it doesn’t have much impact.”?

Or should we rather believe the surveys by the Charities Aid Foundation which found that 55% of the general public thought the Government should rethink the cap, and that 93% of backbenchers agreed that the Government should do all it can to use the tax system to encourage charitable donations from the wealthy, while 65% thought charitable donations should be exempt?

The problem, very clearly, is a lack of real evidence one way or the other. Just as the state of knowledge about giving by higher net worth givers is parlous, so is the state of knowledge about the effect of tax incentives on charitable giving. As with many economic issues, a lot of theory abounds, but relatively little proof; and there are those who argue that tax reliefs don’t really make that much difference.

As the battle rumbles on and on it has opened up some very heated debate about ‘public benefit’ and the value of the voluntary sector versus the value we get out of our taxes paid to government; and the principles behind tax incentives.

The issue has become a political one which pitches economic theory against notions of the state. These are complex and nuanced arguments, as respondents to last month’s DSC e-news survey voiced very cogently, while, when forced to choose, they voted by a two-thirds majority that it is more important for society that wealthy people pay a fair share of tax rather than give to charity. It’s important to recognise, as many pointed out, the two aren’t polar opposites or mutually exclusive.

While this may be a stimulating debate to have, it has taken years of lobbying and testing to get the current tax incentives in place, and whatever your particular bent, the sheer depth of conversation this has created should persuade you of one thing: ill-thought-through last-minute policies which have unintended and largely unforeseeable consequences should not be accepted without a body of evidence as large as that which got us to this point in the first place.

That is why DSC supports the Give It Back George campaign – not as a knee-jerk reaction, or because we automatically think that tax incentives work or because we hold to one particular economic or political model - but because we want to see evidence-based and thoughtful policy-making when it comes to the voluntary sector (and society as a whole).

If you would like to read DSC’s further in-depth commentary on the tax relief cap please click here [pdf document] 

This post was originally published by DSC e-news in 2012