Charity tax relief is not an incentive, it's a right
While the recent Public Accounts Committee report on gift aid makes some good recommendations, it seems to me that it fundamentally misunderstands the gift aid scheme.
During the PAC evidence session into charitable tax reliefs that led to the report, committee members consistently referred to gift aid as an incentive scheme – at one point it is referred to as “a bribe” – and persistently asked whether it is value for money given the cost to the taxpayer.
This skewed view colours the conclusions of the committee that there is not enough evidence that gift aid is an effective mechanism.
Despite the complexity of its inner working the fundamental principle on which gift aid is based is clear, as a National Audit Office report last year clearly restated:
"Tax relief on donations reflects a long-held principle, consistently accepted by Parliament, that charitable income should be exempt from taxation where that income is used for charitable purposes."
If there is an incentive factor, it’s only for companies and higher-rate taxpayers, who can claim back the higher rate part of their income tax paid on gift aided donations. But even they are only receiving back tax they had already paid on their donations.
Accepted wisdom is that tax reliefs do have an incentivising effect at higher incomes – as shown in this response to the Chancellor’s proposed income tax relief cap in 2012.
DSC has previously estimated, using HMRC figures, that higher rate payers contribute around a third of all donations under gift aid, that around a quarter of all higher rate taxpayers may have given through gift aid in 2011/12, and that they gave nearly five times more on average than the average donor.
That leaves another £440m or so which was repaid on corporate donations. We can’t be sure of this figure. According to page 38 of the NAO report it’s “a rough estimate based on corporate tax returns and produced on a different basis to figures from 1999-2000.” Since the millennium changes to gift aid, HMRC has not tracked corporate gift aid so this is the first indication we’ve had in over a decade as to how much is actually claimed.
When questioned on this by the committee, HMRC said around half of corporate relief is charitable trading companies paying up profits to their parent companies.
This would mean that corporate donors claimed £220m in the year, which seems an over-estimate. That would means companies gave around £1bn in gift aided donations to charities, yet our most comprehensive research into voluntary corporate donations in the UK puts the total from all giving at less than £800m. Corporate Gift Aid is clearly ripe for further investigation, as well as reform.
So the committee is right to haul HMRC over the coals about their figures, but let’s not let these technicalities obscure the main point here. Gift aid is successful in bringing in over £5 billion to the charitable sector – over one third of the total individual giving per annum. It could undoubtedly do more, and be better, and HMRC certainly need to get their act together, but it is essentially a good value for money scheme.
This article first appeared in February 2014 in e-news from Directory of Social Change